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Customs ModernizationHandbook

CustomsModernization

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 Bank1818 H Street, NWWashington, DC 20433Telephone 202-473-1000Internet www.worldbank.orgE-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 necessarilyreflect the views of the Board of Executive Directors of the World Bank or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors,denominations, and other information shown on any map in this work do not imply any judgment on the part of theWorld Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Rights and PermissionsThe material in this work is copyrighted. Copying and/or transmitting portions or all of this work without

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For permission to photocopy or reprint any part of this work, please send a request with complete information tothe Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400,fax 978-750-4470, www.copyright.com.

All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422,e-mail 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 backgroundphoto 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 2004352.4'48'091724—dc22 2004059856

Contents

Foreword ixAcknowledgments xiAbbreviations and Acronyms xiiiOverview xvii

PART I: CROSS-CUTTING ISSUES 1

1 STRATEGY FOR CUSTOMS MODERNIZATION 3Luc De Wulf

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

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

4 INTEGRITY IN CUSTOMS 67Gerard McLinden

5 MANAGING RISK IN THE CUSTOMS CONTEXT 91David Widdowson

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

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

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

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

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

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

10 DUTY RELIEF AND EXEMPTION CONTROL 215Adrien Goorman

v

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

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

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

LIST OF BOXES, FIGURES, AND TABLES

BOXES1.1 Morocco Customs Gets Its Staff on Board for the Reform Program 171.2 An Example of Regional Leadership: The TTFSE Regional Steering Committee 21

Annex 1.C.1 The Steps to Release Goods From Time of Arrival 25Annex 1.C.2 The Philippines Time-Release Study: An Example to Follow 26

2.1 Staff Renovation in Bolivian Customs 342.2 Denmark: Integration of Customs and Tax Administration 392.3 Revenue Targets and Autonomy: Illustrations from Tanzania and Uganda 423.1 An Example of Obsolete Customs Legislation 523.2 Sample Checklist to Identify Provisions Requiring Amendment

or New Legislation under the Revised Kyoto Convention 593.3 Morocco’s Adoption of the Convention: A Success Story 603.4 Modernization of Customs Legislation in the Russian Federation 654.1 Leadership and Commitment: Key Issues and Questions 754.2 Regulatory Framework: Key Issues and Questions 764.3 Transparency: Key Issues and Questions 774.4 Automation: Key Issues and Questions 784.5 Modernization of Customs: Key Issues and Questions 794.6 Audit and Investigation: Key Issues and Questions 804.7 Code of Conduct: Key Issues and Questions 814.8 Are Low Salary Levels Really a Factor? 824.9 Human Resources: Key Issues and Questions 844.10 Morale and Organizational Culture: Key Issues and Questions 854.11 Relationship with the Private Sector: Key Issues and Questions 864.12 Lessons Learned from Customs Reforms to Control Corrupt Behavior 885.1 Managing Risk: Customs Valuation 986.1 Implementation of Customs Reform in Mozambique 1096.2 Information Technology in Turkey 1156.3 Import Verification in Peru 1176.4 Customs Cooperation with the Private Sector in Morocco and the Philippines 1236.5 Addressing Corruption in Uganda’s Independent Revenue Authority 1247.1 Diagnostic Framework—Three Project-Specific Cases 1337.2 Inadequacy of Performance Indicators: Project-Specific Cases 1367.3 Designing a Comprehensive Set of Performance Indicators: The Case of

Trade and Transport Facilitation Projects in Southeast Europe 1377.4 Integrated Approach in Process Management: The Case of the Tunisia Export

Development Project 1417.5 Increased Bank Emphasis on Coordination with Other Donors 142

vi Contents

7.6 Quality of Pre-Project Preparation and Design Matter: Two Project-SpecificCases 146

7.7 What Triggered the Modification of Project Objectives or Components 1477.8 Implementation Management Issues: The Case of the Senegal Development

Management Project 1488.1 Peru: Import Verification Program 1698.2 PSI Contract in Madagascar Introduces Targeted and Evolving Verification

Services 1739.1 Example of Restrictive Rules of Origin: The Case of EU Imports of Fish 1929.2 More Restrictive Rules of Origin: The Case of Clothing Under NAFTA Rules 197

10.1 Duty Relief and Exemption Regimes 21610.2 The Reform of Duty Relief Regimes in Morocco 22110.3 Fiji’s Duty Suspension Scheme 22210.4 The Passbook System in Nepal 22310.5 The Bangladesh Special Bonded Warehouse Facility 22410.6 Customs Administration of the Aqaba Export Processing Zone 22910.7 Thailand’s Move to Open Bond Arrangements 23210.8 Computer Application for Management of Investment Project Exemptions 23710.9 Reimbursement of Taxes and Customs Duties on Imported Petroleum

Products in Mali 23811.1 The Genesis of Transit Procedures in the Middle Ages 24611.2 General Requirements with Respect to Seals 24811.3 ASYCUDA Customs Operations in Zambia 25411.4 The SafeTIR 25811.5 The Unique Consignment Reference Number 25911.6 TTFSE Indicators 26312.1 Maritime Security Initiative at Panama Canal Waters 26913.1 IT System Procurement and Costs: Case Study—Turkey 29613.2 Morocco Case Study 29813.3 Customs ICT Deployment Case Study: Turkey 30213.4 Ghana Gateway Project Case Study 30513.5 Senegal Case Study 306

FIGURES1.1 Number of Declarations per Staff per Year in Southeastern Europe, 2002 165.1 Facilitation and Control Matrix 925.2 Compliance Management Matrix 945.3 Risk-Based Compliance Management Pyramid 967.1 Institutional Environment Assessment Framework 1389.1 Regional Trade Agreements in Eastern and Southern Africa 207

11.1 Typical Transit Operation 25211.2 The Sequence of the TIR Operations 25613.1 Modern Customs Declaration Processing Environment 292

TABLESAnnex 1.A.1 Customs Revenue as a Share of Tax Revenue in Selected Countries, 2001 23Annex 1.B.1 Collected Tariff Rates for Selected Countries, by World Region, 2001 24

4.1 Customs Functions and Their Vulnerability to Corruption 694.2 Strategies to Reduce Corruption in Customs 73

Contents vii

5.1 Compliance Management Styles 956.1 Basic Economic Data, 2000 1066.2 Revenue Performance Before and After Customs Reforms 1066.3 Revenue Performance Before and After Customs Reforms 1206.4 Customs Processing Times 1217.1 Approved Amounts for Customs Components of Technical Assistance Projects,

1982–2002 1307.2 Distribution of Approved Operations with Customs Component by Project

Category, 1982–2002 1317.3 Pre-Project Diagnostic Analyses in Technical Assistance Projects, 1982–2002 1327.4 Summary of Objectives 1357.5 Performance Indicators 1367.6 Comprehensiveness of Project Design 1397.7 Summary of Suggested Rating of Outcomes of Customs Activities 1437.8 Correlation Estimation: A Summary 144

Annex 7.A.1 Distribution of Projects with Customs Components by Region, 1982–2002 149Annex 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 2069.3 Overlapping Trade Agreements Cause Problems for Customs 208

Annex 9.A.1 Summary of the Different Approaches to Determining Origin 210Annex 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 24912.1 Selected Operational Practices to Enhance Cargo Security 27612.2 Technical Means to Assist Security Checks 27713.1 Customs Parameters and Information Technology Building Blocks 291

viii Contents

ix

Foreword

The experiences of recent decades have shown thatthe countries that have most successfully integratedinto the world economy also have tended to recordthe highest growth rates. This result should notcome as a surprise. Integration brings with itimproved allocation of resources, intensified com-petition, and pressures to raise productivity, as wellas exposure to new technologies, designs, and prod-ucts. With world trade growth expanding morethan twice as rapidly as world gross domestic prod-uct (GDP) over the past decade, the potentialrewards from participating in world trade are con-siderable. Increased trade openness, through lowerlevels of protection in developed and developingcountries, has contributed to this outcome. Never-theless, it is widely acknowledged that an opentrade regime will only foster trade integration whena range of complementary policies is in place.

One of the most important complementary poli-cies is to put in place a well functioning customsadministration that provides traders with transpar-ent, predictable, and speedy clearance of goods.Indeed, a poorly functioning customs administra-tion can effectively negate the improvements thathave been made in other trade-related areas.

For many countries, achieving efficiency andtransparency in customs operations remains a for-midable challenge. In 2002, over US$6.3 trillion ofgoods crossed international borders. Each one ofthose shipments passed through customs controlsat least twice—at entry and at exit. Customs serv-ices have often had to cope with these growingtrade volumes without any commensurate increasein staff or resources. In addition, customs adminis-trations continue to face changes to their operatingenvironment, which emphasize the need to adjustand modernize their processes. These include:

• more sophisticated and demanding clients,for example, traders who have investedsignificantly in modern logistics, inventorycontrol, manufacturing, and informationsystems

• greater policy and procedural requirementsassociated with international commitments

• proliferation of regional and bilateral tradeagreements, which significantly increase thecomplexity of administering border formali-ties and controls

• heightened security concerns and demands torespond to the threats posed by internationalterrorism and transnational organized crime

• widespread revenue fraud.

Many customs administrations are struggling tomeet the continually increasing demands and pri-orities placed on them.

During the last decade many countries devotedsubstantial resources to reforming and moderniz-ing their customs administrations, often withfinancial and technical support from internationalfinancial institutions and bilateral donors. TheWorld Bank, the World Customs Organization,the International Monetary Fund, the UnitedNations Conference on Trade and Development(the ASYCUDA program especially), and theRegional Development Banks have, for a longtime, been providing such support. As a result, anumber of customs administrations haveimproved their capacities. Yet, far too many stilloperate inefficiently and, to some extent, fail tofulfill their assigned objectives. Modernization ofcustoms is therefore likely to remain on the devel-opment agenda of many governments, and thedonor community will be called upon to continueits support for customs modernization.

In recognition of this, the Trade Department ofthe World Bank prepared this Customs Moderniza-tion Handbook to provide guidance to the manyorganizations and individuals involved in the prepa-ration and implementation of customs moderniza-tion projects. The Handbook draws on the lessonslearned from past successes and failures, both by theBank itself and a range of other organizations. It alsodraws on the collective experience of a wide range ofindividuals with extensive practical experience in

x Foreword

the field. The Handbook is complemented by a 2004World Bank publication of eight case studies ofcustoms modernization in developing countries—Customs Modernization Initiatives. These works, inconjunction with the recent IMF publicationChanging Customs, which focuses on the revenuemobilization function of customs administrations,provide the necessary tools for initiating and under-taking the process of customs reform.

The guidelines contained in the Handbook areaimed at several audiences. First, they are aimed atpolicymakers and national managers who are calledupon to take the lead in providing advice and guid-ance on the direction of reform efforts and securingthe necessary political support for such initiatives.Second, they are aimed at project managers,national as well as from the donor community, whoare required to design and implement customsmodernization projects. Third, they are aimed atstudents of trade facilitation, who will find in theHandbook the context and operational modalities

of an organization that plays a crucial role in theoverall trade logistics chain.

This Handbook is not intended to be encyclope-dic. It is deliberately selective. It avoids many tech-nical issues that are well covered in the many man-uals and guidelines provided by organizations suchas the World Customs Organization. Rather, itfocuses on the critical issues that need to beaddressed when designing and implementing effec-tive and sustainable modernization projects andrelated initiatives.

We at the World Bank hope that the CustomsModernization Handbook will help in the achieve-ment of the objective of helping policymakers toimplement the needed reform and overall modern-ization that will enable customs to fulfill its role inthe 21st century.

Danny M. LeipzigerVice President and Head of the Poverty

Reduction and Economic Management Network

Acknowledgments

This project would not have been possible withoutthe patience, understanding, and generous supportand contributions provided by many colleaguesand customs experts from national customs organ-izations, international organizations, and in theprivate consultancy business.

Larry Hinkle, Lead Specialist in the Bank’sAfrica Region, encouraged the initiation of thisproject, and the Africa Region provided financialsupport at its initiation. Ataman Aksoy and YvonneTsikata were instrumental in getting this projectlaunched.

Uri Dadush, Director of the Trade Department,gave this project priority status throughout itsdevelopment and provided his wisdom and guid-ance at the most critical stages. John Panzer, ourManager in the Trade Department, provided theteam with his unfailingly enthusiastic support andleadership and ensured the timely completion ofthe project.

The staff of the World Customs Organization,and especially its Deputy Secretary General,Mr. Kunio Mikuriya, who also acted as PeerReviewer, generously shared their operational expe-rience and their time with the editors andcontributed to several chapters. The staff of theInter-American Development Bank and of theInternational Monetary Fund also supportedthe project and provided advice and comments atvarious times during the preparation of the book.Our special appreciation goes to François Corfmatfrom the IMF who was a Peer Reviewer and whomade significant contributions to several chapters.All generously shared their insights and expertiseduring the process of defining the scope of theproject and provided guidance in its preparation.

The authors of the thirteen chapters contributedtheir expertise and showed great patience with themany demands placed on them by the editors. Ourdear late colleague Jit Gill contributed with hisadvice and comments with characteristic profes-sionalism and personal warmth. Special thanks are

xi

also due to the following colleagues and friendswho contributed to making this book possible:Amparo Ballivián (WB), Ed Campos (WB), Patri-cio Castro (IMF), Lee Deegan (Australian Customs,previously at the WCO), Antoni Estevadeordal(IDB), Bruno Favaro (UNCTAD), Odd Fjeldstad(Michelsen Institute), Alan Hall (consultant),Moshe Hirsch (Hebrew University Law School),Bernard Hoekman (WB), John Holl (consultant),Irene Hors (OECD), Darryn Jenkins (consultant),Peter Kalil (IDB), Holm Kappler (previously at theWCO), Joe Kelly (HM Customs and Excise), DavidKloeden (IMF), Michael Lane (consultant), PatriciaLaverly (OED), Bob Mall (WCO), Nick Manning(WB), Fabrice Millet (UNCTAD), Tony Mort(consultant), Mark Pearson (COMESA), JohnRaven (ICC), Will Robinson (WCO), GonzaloSalinas (WB), Edward Siaw (consultant), GrahamSmith (WB), Frederick Z. Stapenhurst (WB),Kati Suominen (IDB), Victor Thurony (IMF),Mashiho Yuasa (University of Michigan LawSchool), and Gianni Zanini (WB).

Our colleagues in the Trade Department of theWorld Bank strengthened our team and made sig-nificant contributions. Special thanks to MichelZarnowiecki who, in addition to being PeerReviewer, shared his technical expertise during thewhole process and significantly improved severalsections of the handbook. We also extend thisappreciation to Mr. Gerard McLinden (at the WCOuntil early 2004) who not only wrote several chap-ters but also contributed greatly to finalizing themanuscript. Finally, the project also benefited fromthe patient, professional, and extremely competentsupport provided by Melanie Faltas and Zeba Jetha.Special acknowledgment goes to Lili Tabada, whoundertook an enormous set of responsibilities,including preparing the desktop version, workingwith the publisher, and helping the team with hersuperb editing skills. She excelled in all these tasksand this project could not have been done withouther competent participation.

Abbreviations andAcronyms

ACI Advanced Cargo InformationACI Airports Council InternationalACP Africa, the Caribbean and the

PacificACP Autoridad del Canal de PanamáACV Agreement on Customs ValuationADCS Automated Data Collection SystemAfDB African Development BankAFTA Asian Free Trade AssociationAGOA African Growth and Opportunity

ActANZCERTA Australia New Zealand Closer

Economic Relations TradeAgreement

ANZSCEP Agreement between New Zealandand Singapore on a CloserEconomic Partnership

APEC Asia-Pacific Economic CooperationARA Autonomous Revenue AuthorityARO Agreement on Rules of OriginASAC Aviation Security Advisory

CommitteeASEAN Association of Southeast Asian

NationsASEZA Aqaba Special Economic Zone

AuthorityASYCUDA Automated System for Customs

DataATA Air Transport AssociationBDV Brussels Definition of ValueBGMEA Bangladesh Garments

Manufacturing and ExportAssociation

BIR Bureau of Internal RevenueBIVAC Bureau of Inspection Valuation

Assessment and ControlBOC Bureau of CustomsBOT Build-Operate-TransferBOT Bureau of TradeBOO Build, Operate, and OwnCA Crown AgentsCACM Central American Common MarketCAM Customs Assistance Mission

CARICOM Caribbean CommunityCAS Country Assistance StrategyCBI Cross-Border InitiativeCBP US Bureau of Customs and Border

ProtectionCCC Customs Cooperation CouncilCCO Central Customs OfficeCCP Central Control PointCEFACT United Nations Centre for Trade

Facilitation and Electronic BusinessCEPS Customs Excise and Preventive

ServicesCIF Cost, Insurance, and FreightCOMESA Common Market for Eastern and

Southern AfricaCRO Committee on Rules of OriginCSD Container Security DeviceCSI Container Security InitiativeCSTF Cargo Security Task ForceC-TPAT Customs–Trade Partnership Against

TerrorismDF Diagnostic FrameworkDFID Department for International

DevelopmentDSS Duty Suspension SchemeDTI Direct Trader InputEAC East African Cooperation EBA Everything but ArmsEC European CommunityECA Europe and Central AsiaECAC European Civil Aviation ConferenceECO Economic Cooperation

OrganizationECOWAS Economic Community of West

African StatesEDCS Electronic Data Collection SystemEDI Electronic Data InterchangeEEC European Economic CommunityEFT Electronic Funds TransferEFTA European Fair Trade AssociationEPZ Export Processing ZoneEU European UnionFAK Freight of all Kinds

xiii

FDI Foreign Direct InvestmentFOB Free on BoardFTA Free Trade AgreementFTZ Free Trade ZoneGAO General Accounting OfficeGATT General Agreement on Tariffs and

TradeGCMS Ghana Customs Management

SystemGCNet Ghana Community NetworkGDP Gross Domestic ProductGEP Global Economic Prospects GMS Greater Mekong SubregionGOIEC General Organization for Import

and Export ControlGOM Government of MozambiqueGSP General System of PreferencesGST General Sales TaxGVC GATT Valuation CodeHQ HeadquartersHRO Harmonized Nonpreferential Rules

of OriginHS Harmonized Commodity

Description and Coding SystemHWP Harmonization Work ProgramIACA International Air Carriers

AssociationIATA International Air Transport

AssociationICAC Independent Commission Against

CorruptionICAO International Civil Aviation

OrganizationICC International Chamber of

CommerceICMP International Customs

Modernization ProcessICR Implementation Completion

ReportICS Inspection and Control ServicesICT Information and Communications

TechnologiesIDB Inter-American Development BankIDI Institutional Development ImpactIFALPA International Federation of Airline

Pilots AssociationsIFIA International Federation of

Inspection AgenciesIGAD Intergovernmental Authority on

Development

ILO International Labor OrganizationIMF International Monetary FundIMO International Maritime

OrganizationIOC Indian Ocean CommissionIRU International Road Transport

UnionISPS International Ship and Port Facility

SecurityIT Information TechnologyITF International Transport Workers

FederationLDC Least Developed CountryMDCS Mobile Data Collection SystemMFN Most Favored NationMODAAC ASYCUDA++ Accounting ModuleMODTRS ASYCUDA++ National Transit

ModuleMOF Ministers of FinanceMOF Ministry of FinanceMPF Ministry of Planning and FinanceMTSA Maritime Transport Security ActMUB Manufacturing Under BondNAFTA North American Free Trade

AgreementNCTS New Computerized Customs

Transit SystemNGO Nongovernmental OrganizationNPR Nepalese RupeesNTB Nontariff BarriersNVOCC Nonvessel Operating Common

CarriersOECD Organisation for Economic

Co-operation and DevelopmentOED Operations Evaluation

DepartmentOP Operational PolicyOSC Operation Safe CommercePAD Project Appraisal DocumentPIN Personal Identification NumberPRA Port Risk AssessmentPRSP Poverty Reduction Strategy PaperPSI Preshipment InspectionPSR Project Status ReportPTA Preferential Trade AgreementRCDP Russian Customs Development

ProjectRFID Radio Frequency IdentificationRIFF Regional Integration Facilitation

Forum

xiv Abbreviations and Acronyms

Abbreviations and Acronyms xv

RMG Ready Made GarmentsRSC Regional Steering CommitteeRSO Recognized Security OrganizationRTCD Road Transit Customs DeclarationSAARC South Asian Association for

Regional CooperationSACU Southern African Customs UnionSAD Single Administrative DocumentSADC Southern African Development

CommunitySADOC Système de l’Administration des

Douanes et de l’Office des Changes;Computerized Support forCustoms Clearance

SAL Structural Adjustment Loans andCredits

SAR Staff Appraisal ReportSAT SatisfactorySBW Special Bonded WarehouseSCC State Customs CommitteeSDT Special and Differential TreatmentSECI South East Cooperation InitiativeSGS Societé Générale de SurveillanceSITPRO Simplifying International TradeSOLAS International Convention for the

Safety of Life at SeaSPARTECA South Pacific Regional Trade and

Economic Co-operation AgreementSSP Sector Strategy PaperSSP Shipper Security PlanSUNAT Superintendencia Nacional de

Administracion Tributaria; InternalRevenue Service

TA Technical AssistanceTAEPD Trade Assistance Evaluation Project

DatabaseTAL Technical Assistance LoanTAP Temporary Admission for Inward

ProcessingTARIC Tarif Integré de la Communauté;

The Integrated Tariff of theCommunity

TCCV Technical Committee on CustomsValuation

TCRO Technical Committee on Rules ofOrigin

THA Tanzania Harbors AuthorityTI Transparency InternationalTIMS Trade Information Management

SystemTIR Transport International

RoutierTRA Tanzania Revenue AuthorityTRACECA Transport Corridor Europe

Caucasus AsiaTRIE Transit Routier Inter-ÉtatsTRIPS Trade-Related Aspects of

Intellectual Property RightsTSA Transportation Security

AdministrationTTCA Transit Transport Coordination

AuthorityTTFSE Trade and Transport Facilitation in

Southeast EuropeUCR Unique Consignment

Reference UD Utilization DeclarationUDEAC Union Douanière des Etats de

l’Afrique CentraleUNCTAD United Nations Conference on

Trade and DevelopmentUNECE United Nations Economic

Commission for EuropeUNSAT UnsatisfactoryURA Uganda Revenue AuthorityUS United StatesUTRA Technical Unit for Restructuring

CustomsVAT Value Added TaxWBCG Walvis Bay Corridor GroupWCO World Customs OrganizationWEF World Economic ForumWTO World Trade OrganizationZRA Zambian Revenue Authority

xvii

OVERVIEW

This handbook aims to make a positive contributionto the efforts that many countries are undertaking tomodernize their customs administrations. Thehandbook views a competent and well-organizedcustoms service as one that successfully balances itsvarious responsibilities to ensure a high level ofcompliance with revenue objectives and regulatoryrequirements while at the same time intervening aslittle as possible in the legitimate movement ofgoods and people across borders.

The handbook recognizes that conditions differgreatly across countries, so that each customsadministration will need to tailor its modernizationefforts to national objectives, implementationcapacities, and resource availability. Nevertheless,meeting the modernization objectives will mostlikely require the adoption of the core principlesdiscussed in this handbook: adequate use of intelli-gence and reliance on risk management; optimaluse of information and communications technol-ogy (ICT); effective partnership with the privatesector, including programs to improve compliance;increased cooperation with other border controlagencies; and transparency through information onlaws, regulations, and administrative guidelines.

Success in customs modernization is, as impor-tantly, tied to the overall trade policy environment.Simple, transparent, and harmonized trade policiesreduce administrative complexities, facilitate trans-parency, and reduce the incentives and opportuni-ties for rent-seeking and corruption. Customsmodernization, therefore, also needs to be exam-ined from the broader and complementary per-spective of trade policy reform.

Improving Customs Processes Is Part of the TradeFacilitation Agenda

Trade facilitation measures need to complementtrade liberalization if countries are to increasetheir external competitiveness and become betterintegrated into the world economy. When theEuropean Community, introduced a common exter-

nal tariff in 1968 it quickly realized that to fully ben-efit from its common market, it needed to streamlinecustoms processes. In the same vein, the World TradeOrganization (WTO) in 1996—as part of the Singa-pore agenda—added trade facilitation to its negotia-tion agenda realizing that nontariff barriers, to whichexcessive customs costs belong, are at times moreimportant trade barriers than tariffs and prevent theachievement of trade liberalization objectives.

Trade involves goods crossing borders. Thisrequires that a number of procedures foreseen inthe national legislation be followed. Some of theseprocedures pertain to issues of security and stan-dards, while others deal with customs. Customsprocedures are governed by the national legislationand implemented by customs staff that operatemostly under the Ministry of Finance. Conformingto these procedures is not costless, but these costsare often excessive. It is not the intention of thehandbook to elaborate on inefficiencies nor todetail all the dysfunctionalities of customs organi-zations and customs operations, even though someof these are described in individual chapters, asintroduction on how best to remedy them. Yet, it istheir persistent recurrence and their impact on acountry’s competitiveness that prompted tradersand political leaders to seek out ways to make theircustoms organizations more effective and efficient.This handbook aims at assisting them in this ambi-tion. It must suffice, therefore, to briefly note themain inefficiencies that these reforms aim toaddress. First, outdated legislation may not clearlyestablish the authority of customs, may be out oftune with international commitment, may providefor inadequate transparency and predictability, andmay require complex procedures while preventingfull use of information technology and risk analy-sis. Second, customs staff may lack the competenceto interface with traders that operate in a constantlychanging and challenging business. Often theircompensation packages, including career manage-ment and training, are inadequate, so that moti-vating and retaining qualified staff is a major

challenge. Third, operational procedures are oftenexcessively and unnecessarily complex and open todiscretionary decisions while exporters have pooraccess to duty-free inputs. Fourth, customs all toooften makes insufficient use of available communi-cations and information technology, and thus is outof tune with modern business practices that rely onadvanced notification, direct trader input, andtracking devices. This increases costs to traders,opens the door to discretionary decisions, andundermines oversight and audit activities. Fifth,high levels of corruption characterize many a cus-toms agency, as is testified to in investors’ surveysand corruption indexes. Sixth, smuggling activitiesundermine revenue generation and impart unfairadvantages to unscrupulous traders, and under-mine the intended protection policies embedded inthe tariff structure. In sum, customs procedures areoften excessively time consuming, unpredictable,and weak in their revenue generation function.

Good Diagnostics Are the Key Starting Point

Customs operations consist of sets of interlockingprocesses. To be efficient and effective they need to beadapted to changing trade practices and modernmanagement approaches as well as reflect the variousobjectives of the country. Yet, customs practices inquite a few countries are not well attuned to thesecriteria. Rooted in long-standing traditions, they tendto delay the clearance of cargo and conduct operationsin a nontransparent manner. Experience shows thateffective customs modernization processes generallystart with good initial diagnostic work to identify theshortcomings of the existing system, to define a strat-egy for reform, and to mobilize stakeholder support.Successful modernization also requires a comprehen-sive approach, that is, an approach that encompassesall aspects of customs administration to address theissues identified, as well as an adequate sequencing ofactions. Strategies need to be realistic and should con-sider the country’s capacity to implement, the timethat is required, and the level of stakeholder and polit-ical support that is needed.

These reform efforts also need to be consistentwith the trade policies pursued and should have thecapacity to adapt to changing circumstances. Forexample, the emphasis on issues such as trade facil-itation and national security are now more preva-lent than in the past.

Human Resources Policies Need to Be at the Center of Customs Reforms

The task of customs has become increasingly diffi-cult because of the growing complexities of tradepolicy due to the proliferation of regional andinternational trade agreements, the greater sophis-tication of traders, and the multiple and shiftingobjectives imposed on customs. Security is now anew important challenge. Uniformity of customsoperations across the territory and across cargo cat-egories is important, and speedy release of goods iscrucial to supporting the competitiveness oftraders. There is also a need to adhere to interna-tional standards on value and classification, as wellas regional standards on rules of origin.

Good human resources management is thelinchpin to effective and efficient customs adminis-tration. This is too often neglected. The manage-ment of human resources is multifaceted. Itincludes recruitment, training, staff compensationand promotion, as well as enforcement. None ofthese tasks is easy, and often must be implementedin a constrained environment. These difficultiesshould not discourage the investigation of possiblenew initiatives and alternative approaches. How-ever, case studies do suggest that within these con-straints still much more attention should be givento human resources issues.

To address the constraints imposed on humanresources reforms by rigid and often outdated civilservice administration policies, many countrieshave pursued drastic organizational changes. Forexample, Autonomous Revenue Agencies (ARAs)have been established to avoid rigid civil servicerules, as well as to provide more financial auton-omy and greater flexibility in operational matters.However, experience has shown that creating anARA is no guarantee for success because they havetoo often been focused on providing better staffcompensation without sufficient attention to theother elements of customs operations that enhanceeffectiveness and efficiency. Also, quite a few ARAsfailed to maintain, over the longer term, the flexi-bility and the autonomy with which they were orig-inally established.

Another mechanism to implement reforms hasbeen the pursuit of management contracts with theprivate sector. Management contracts can indeedimprove aspects of customs operations if they are

xviii Overview

well designed and monitored. So far, these manage-ment contracts have largely been tested in uniquecircumstances in countries emerging from severeconflicts (Mozambique and Angola, for example)and where institutional capacity was exceedinglyweak. Engaging private service operators in thosecountries had the advantage of substantiallyimproving revenue performance in the short runand under difficult circumstances. The track recordfor transferring management capabilities to nation-als, however, is still being tested. Initial reports sug-gest that this has proven more difficult than origi-nally imagined.

Changes in the organizational structure of cus-toms can at times be instrumental to improvingperformance, as change can lift important opera-tional constraints. Evidence suggests, however, thatsuch changes will only have lasting effects if theycontribute to good human resources managementand better customs clearance practices.

An Adequate Legal Framework Is Important

The modernization of customs laws and regulationsand their supporting legal environment is an essen-tial component of the reform effort. In this area,countries can refer to (or adopt) the Revised KyotoConvention, which provides both the legal frame-work and a range of agreed on standards to improvecustoms operations with a view toward standardiz-ing and harmonizing customs policies and proce-dures worldwide. Countries that are signatories ofthe Convention can still tailor their policies and pro-cedures in specific ways to meet their unique legal,political, cultural, and economic requirements.

In many countries the Customs Code needs to bemodernized, especially to exclude noncore customselements, seek harmonization and compliance withagreed on international commitments, and ensuretransparency and predictability by providing basicinformation on matters such as rules, decisions,consultation mechanisms, and adequate appealsprocesses. A revised Code can also help trade facili-tation by supporting the use of risk managementpractices and by eliminating complex or redundantcustoms formalities that delay clearance and createopportunities for unnecessary discretionary inter-ventions. Finally, the Code should also grant ade-quate authority for customs to achieve its enforce-ment and compliance goals.

Improved Integrity Is Key to Promoting Investment and Growth

Customs is frequently perceived as being corrupt.To the extent that this is true, this image negativelyaffects the overall investment climate of the coun-try and the processing of international trade trans-actions. Corruption undermines the country’sexternal competitiveness and its attractiveness todomestic and foreign investment. If left unchecked,this image of corruption undermines the growthpotential of the country.

Customs is vulnerable to corruption because thenature of its work grants its officials substantialauthority and responsibility to make decisions thataffect the duty and tax liability of traders or theadmissibility of goods. High tariffs and complexregulations enhance opportunities and incentives.That many customs staff members are poorly paidadds to the problem.

The adoption of procedures that provide littlediscretion to customs staff and that have built-inaccountability mechanisms reduces both the oppor-tunity and incentive for corruption. In conjunctionwith improved trade policies, the first line ofdefense against corruption consists of implement-ing modern procedures that reduce face-to-facecontact between traders and customs officials andthat reduce the discretionary powers of customsofficials. In addition, providing adequate staff com-pensation, enhancing the risk of detection, andstrengthening the capacity to investigate and prose-cute breaches of integrity would go a long waytoward promoting integrity in customs. Most cus-toms managers are of the opinion that corruption issuch a prevalent phenomenon today that counter-measures would require the implementation of spe-cially designed policy efforts. This is the approachthat is promoted by the World Customs Organiza-tion and is incorporated into the Revised ArushaDeclaration on Integrity in Customs.

In looking to implement the key elements of theRevised Arusha Declaration, experience suggeststhat a good starting point is to conduct a compre-hensive assessment of the situation to identify theshortcomings that present opportunities for cor-ruption and to establish realistic priorities, as wellas practical objectives and activities, all leading toan integrity plan that should be a part of all com-prehensive customs reform efforts.

Overview xix

Risk Management Underpins Much of Modern Customs Practices

In an effort to achieve an appropriate balancebetween trade facilitation and regulatory control,customs administrations are generally abandoningtheir traditional, routine “gateway” checks and arenow applying the principles of risk managementwith varying degrees of sophistication and success.

Organizational risk refers to the possible eventsand activities that may prevent an organizationfrom achieving its objectives. Risks facing customsinclude the potential for noncompliance with cus-toms laws as well as the potential failure to facilitateinternational trade. Customs, like any other organi-zation, needs to manage its risks and do so whileinterfering as little as possible with the flow of legit-imate trade. There clearly is a trade-off betweencontrol and trade facilitation. Too much of onemakes it difficult to achieve the other. Customstherefore needs to apply a set of management pro-cedures that takes this into account. These proce-dures include the identification, analysis, evalua-tion, and mitigation of the risks that may affect theachievement of these objectives.

Basic risk management has always been funda-mental to customs operations, and has guided theformulation of antismuggling policies, the func-tioning of border controls to verify the movementsof goods and passengers, and the establishment ofdocumentary controls and physical inspection pro-cedures. However, in recent times the increasingcomplexity, speed, and volume of internationaltrade, fueled by technological advances that haverevolutionized global trading practices, have signifi-cantly affected the way in which customs authoritiesimplement risk management. This has led manycustoms administrations to adopt a more disci-plined and structured approach to managing risk.

Customs needs to evaluate the risks that are pre-sented by the nature of its operations. This includesthe need for customs to review its operational pro-cedures and assess where breaches of proceduresare likely to jeopardize the attainment of statedobjectives. Such assessment could be included inthe above-mentioned overall diagnostic exercise. Inother words, customs needs to provide a risk mapthat identifies the potential vulnerabilities of itsprocesses and determine how its procedures mayneed to be geared toward ensuring better realiza-

tion of its objectives. On the basis of the risk assess-ment, a risk containment strategy should bedefined. This implies that priorities would be set,operational details would be geared toward thesepriorities, and resources would be effectively andefficiently deployed. If smuggling turns out to be amajor problem, the strategy should reflect this, andborder posts and mobile inspection teams mayneed to be strengthened. If undervaluation is amajor problem, there may be a case for strengthen-ing the valuation unit and for increasing the num-ber of traders subject to post-clearance audit. If therisk is that goods tend to be misclassified to attracta lower tariff rate or are declared with lower unitcounts or weights, there may be a need to physicallyinspect the cargo. In any event, risk managementshould ease the controls on the less risky aspects oftrade and should focus on the part that representsthe greatest risk. This would reflect a balancedapproach between control and trade facilitation.

Customs Valuation Is a Core Customs Function

Customs valuation practices are subject to theWTO Agreement on Customs Valuation (ACV),which mandates that the customs value ofimported goods, to the greatest extent possible,should be the transaction value, that is, the pricepaid or payable for the goods. However, valuationfraud is frequently reported as a major problem indeveloping countries, and many of them still findthat implementing the ACV presents one of themost challenging aspects of customs work. Valua-tion work is particularly difficult in some countriesin which the reliability of commercial invoicestends to be poor, and where trade undertaken bythe informal sector and in second-hand goods issignificant. Also, many countries are still illequipped to undertake post-clearance audit.

Substantial efforts have so far been made toexplain the intricacies of the ACV to customs offi-cials of developing countries. Yet, most observersrealize that valuation reform, in the absence ofcomprehensive customs modernization programs,is likely to disappoint. A narrow focus on valuationwork will fail if reform takes place within an admin-istratively and technically ill-equipped customs.The reform elements that will benefit valuationwork must include the streamlining of operationalprocedures, the introduction of a modern customs

xx Overview

compliance improvement strategy based on a for-malized risk management strategy, the use of post-clearance audits, the development of a commercialintelligence capacity, and the adoption of appro-priate incentives and disincentives designed toprogressively increase the level of voluntarycompliance.

Direct technical assistance for improved valua-tion work might be more productive if such assis-tance were concentrated on the development ofvaluation databases, risk management systems, andpost-release review and audit. A valuation databaseshould be established and constantly updated toprovide customs with a practical tool for researchand risk management purposes. The valuationfunction in Customs could be strengthened by set-ting up an appropriate legal framework; establish-ing valuation control procedures based on selectivechecking, risk analysis and management, and post-release audit; establishing central and regional val-uation offices; and providing specialized training.

The hiring of preshipment inspection (PSI)companies may be useful in assisting customs withvaluation work during its initial reform stages,where capacity is being enhanced to carry out thevaluation function. However, if PSI services areused, care needs to be exercised to maximize theirutility and to ensure maximum consistency withthe WTO valuation principles. This handbookspells out a number of conditions that should beinvestigated when considering the adoption of PSIservices or when evaluating their contribution.

Rules of Origin Should Be Simplified

Determining the country of origin, or the “nation-ality,” of imported products is necessary for theapplication of basic trade policy measures such astariffs, quantitative restrictions, antidumping andcountervailing duties, and safeguard measures, aswell as for requirements relating to origin markingand public procurement, and for statistical pur-poses. Such objectives are met through the applica-tion of basic or nonpreferential rules of origin.Countries that offer zero or reduced duty access toimports from certain trade partners apply preferen-tial rules of origin. These differ most frequentlyfrom the nonpreferential ones. Preferential rulesare designed to ensure that only goods originatingfrom participating countries enjoy preferences.

However, rules of origin can be designed to restricttrade and, therefore, can and have been usedas trade policy instruments. The proliferation offree trade agreements with accompanying preferen-tial rules of origin is increasing the burden on cus-toms in many countries because the clearing ofpreferential trade is more complex than nonprefer-ential trade. This suggests that the trend towardmore preferential free trade agreements may con-flict with trade facilitation.

The determination of the country of origin ofproducts has, in the last few decades, become moredifficult as technological change, declining trans-port costs, and the process of globalization have ledto the splitting up of production chains and the dis-tribution of different elements in the production ofa good to different locations. The issue becomes,which one or more of these stages of productiondefine the country of origin of the good?

WTO members have so far failed to reach anagreement on the definition of rules of origin,despite efforts undertaken in the World CustomsOrganization (WCO) since 1995. Having harmo-nized rules of origin for nonpreferential purposeswould save time and costs to traders and customsofficers and provide for greater certainty and pre-dictability of trade. Harmonized rules would alsohelp avoid trade disputes that arise from uncertain-ties in the determination of the country of originwith regard to antidumping and countervailingduties, safeguard measures, and governmentprocurement decisions. In general, clear, straight-forward, transparent, and predictable rules oforigin, which require little or no administrative dis-cretion, will add less of a burden to customs thancomplex rules.

Good Duty Relief and Exemption Control SystemsAre Important

Customs may provide duty relief for some imports.This practice is mainly used for the importation ofinputs used for the manufacture of export prod-ucts. The justification for doing so is simple. Anyduty paid on these inputs would increase the cost ofthe exports and make these exports less competi-tive. In fact, following the widely accepted destina-tion principle of taxation, only goods destined fordomestic consumption should bear a tax burden.Duty relief for inputs that are directed toward the

Overview xxi

production of exports can be granted in two ways:either a suspense regime is applied and no dutiesfor imported inputs are paid at the point of import;or duties are paid and later refunded, when theproducts into which the inputs are incorporatedare exported. The WCO Revised Kyoto Conventionprovides guidelines on how this should be doneand these can be reflected in the Customs Code andtranslated in operational guidelines for importersand customs staff. However, experience shows thatmany developing countries have difficulty in prop-erly administering and monitoring duty relief andexemption regimes, resulting in abuse, fraud, andrevenue leakage. In the absence of smoothly operat-ing duty relief mechanisms, export manufacturershave to produce at higher cost than would be thecase if they had full and easy access to productioninputs at world prices.

Export manufacturers have a preference fortemporary admission systems, bonded warehouses,and export processing zones over duty drawback,especially when tariffs are high, when inflationerodes the duty refunds, and when interest rates forworking capital are high. The prepayment ofimport duties on inputs increases the productioncosts of the exporter. The drawbacks have all toooften been disbursed late, thus substantially erod-ing real value when inflation and financing costsare high. However, governments in most develop-ing countries require customs to focus on revenuecollection rather than trade facilitation and, there-fore, tend to prefer drawback to temporary admis-sion systems.

Managing duty relief schemes in a secure andcost effective way requires well-defined processesand controls. It requires that special mechanisms beput in place to ensure that claims for duty relief arelegitimate and correctly executed, and that goodsadmitted under duty suspense regimes are effec-tively incorporated in exports and not diverted forhome consumption.

The scope of duty exemptions should be limitedas much as possible as exemptions can be abused,thus leading to unfair competition and revenuelosses. Moreover, there are good economic andadministrative reasons for maintaining dutyexemptions only as required by international con-ventions and for noncommercial goods. Until theredundant exemptions are eliminated, customsshould devote adequate technological and man-

power resources to the control and monitoring ofsuch exemptions.

Customs Procedures Should Facilitate Transit

Poor transit procedures are a major obstacle to tradeand penalize many landlocked developing coun-tries. A transit system aims to facilitate the transportof goods through a customs territory, without levy-ing duties and taxes in the countries of departureand transit, in accordance with the destination prin-ciple of taxation that states that indirect taxes shouldonly be levied in the country of consumption. TheCustoms Code should provide transit-related legis-lation, failing which, transit should be regulated by abinding agreement between customs and the differ-ent parties affected by the transit operation.

The core provisions of a good transit systeminclude that the shipments be sealed at the point ofdeparture, that guarantees can be made available toensure the payments of duties and taxes if tradersdo not provide proof that the goods have left thecountry, and that customs has an information sys-tem that informs it when the goods have left thecountry so that the guarantee can be released. Inmany countries these core elements are either lack-ing or weak and should be the focus of any transitmodernization initiative.

Trade policies should recognize that customstransit is only one part of a wider range of policyissues that affect transit. These other issues pertainto many other participants and procedures, includ-ing cross-border vehicle regulations, visas for truckdrivers, insurance, police controls, and the qualityof infrastructure. Even if customs transit proce-dures are made effective and efficient, full tradefacilitation will require that these issues beaddressed. The TIR (Transit Routier Interna-tional—the international road transit procedures)and its network of national guaranteeing associa-tions offer the best current reference system.

Effective and efficient transit facilitation institu-tions such as corridor agreements can promoteactive cooperation between and among transit andlandlocked countries. Transit agreements areimportant in forming and shaping such coopera-tion, either at the bilateral, subregional, or regionallevel. Transit operations will benefit from goodpublic–private cooperation that can identify defi-ciencies in border-crossing procedures.

xxii Overview

Overview xxiii

Security Has Become an IntegralCustoms Objective

The emergence of international terrorism hascaused security to become a major issue for manygovernments, and customs administrations areincreasingly called upon to contribute to nationalsecurity objectives. In the past, many customsadministrations performed most of their preven-tive operations as goods arrived at seaports, air-ports, and land borders, based upon an entry decla-ration made at the time of importation. To providethe level of security that is required, governmentswill increasingly depend on information and riskassessments that are undertaken in advance of thearrival of the cargo in the country of destination.International conventions that apply to sea and airtransport provide for agreed upon mechanisms toenhance the security of these modes of transporta-tion—vehicles, cargo, and personnel—as well ashow these transport modes are operated. Severalnational governments, particularly that of theUnited States of America, have issued regulationsand have promoted private–public sector agree-ments to enhance security. These, again, are largelybased on the advance submission of informationand certification that the particular companiesadhere to a range of security standards. Such regu-lations are constantly being refined and imple-mented. Customs’ skill in assessing the informationthrough analytical processes, deployment ofresources, effective communication and decision-making, therefore, has become even more impor-tant than in the past.

Protecting society involves protection of theentire international trade supply chain fromthe moment the cargo leaves the export country tothe moment of arrival at the destination country.This changing environment requires an “all ofgovernment” approach. In this way, governmentscan use customs as a key resource in border secu-rity, using its experience of managing risks andknowledge of international trade as an importantelement of national security. Thus, customs canusefully complement the contributions made byother competent agencies, such as immigration,intelligence agencies, and those involved in policingmaritime, aviation, and land operations.

While security is of great importance to govern-ments and traders, customs has an equal responsi-

bility to facilitate legitimate trade. If applied cor-rectly, security can enhance facilitation by buildingbusiness confidence, increasing predictability, and,as a consequence, facilitating inward investment.However, the international community will needto monitor how specific security initiatives andadvance notice requirements will affect weakertrading partners, particularly those that use portsthat are not receiving technical assistance tostrengthen their security to the satisfaction of theports of destination. These traders may have diffi-culties in fully complying with the advance noticerequirements.

While it is not possible at this time to predict thetrade-related consequences of the heightened secu-rity agenda, it seems probable that the countriesthat feel vulnerable to terrorist attack will regardconsignments from certain countries as represent-ing a higher risk. In this regard, the level of integra-tion of the world economy is such that evencountries that are not directly involved in a conflictor subject to terrorist attack suffer losses in tradeand welfare as a result of increased security con-cerns and higher frictional costs of trade. For thosecountries with a high degree of reliance on trade(ratio of trade to GDP), including many developingcountries, the need for concerted action in thesecurity area becomes a key priority in the develop-ment agenda.

Information and Communications TechnologyPromotes Customs Modernization

An effective customs administration that lever-ages technology can benefit from improved trans-parency, greater efficiency, and enhanced security.However, the benefits that could be derived fromgreater reliance on ICT has at times been under-mined by the failure to streamline customs proce-dures, thus creating a process where outdated man-ual practices continue alongside computerizedpractices. Although ICT for customs administra-tion is not a panacea or an end in itself, it can pow-erfully contribute to effective customs administra-tion and operations when integrated into a broadermodernization effort.

To meet its mission, a customs administrationmust effectively integrate modern practices andprocesses with ICT-driven customs managementsystems. In doing so, customs should identify

xxiv Overview

realistic and practical targets and objectives that aretailored to its own specific circumstances. DesirableICT solutions are not necessarily the very latest andmost sophisticated ones available, but rather, theones that are most appropriate for the country’soperating environment, resource base, telecommu-nications infrastructure, and realistic developmentambitions. In any event, the ICT solution chosenmust assist customs in all its core business func-tions and must provide a platform that enablesachievement of its long-term vision.

In its choice of computer solutions, customs hasthe option of either developing a national systemthat is adapted to national needs, or acquiring anoff-the-shelf system. National solutions have theattraction of perfectly matching the specificrequirements of a given country, of developingnational computer skills, and of facilitating the sys-tem’s maintenance and development. Yet, suchnational solutions tend to be expensive, and it hasat times proven difficult for customs officials toconvey to the ICT technicians the complex transac-tions that need to be programmed. Off-the-shelfsolutions benefit from the fact that the variousmodules have been tested and avoid the need to“reinvent the wheel.” Where these solutions do notfully satisfy national needs, or where national cus-toms desires a variant of the solution offered, thereis the possibility of customizing the solution or ofadding on separate modules that interface with theoff-the-shelf solution. On balance, the handbookadvocates that policymakers take a hard look at off-the-shelf solutions before they consider designing anational solution.

ITC solutions tend to be expensive, even if theyenhance efficiency. Experience suggests that muchis to be gained from a well-balanced financing planfor the initial installation, maintenance, andupgrading, as well as financing plans to includeexternal and domestic resources. Also, procure-ment procedures should be transparent and shouldensure value for money by carefully weighing boththe technical and financial proposals.

Structure of the Handbook

This volume has three parts. The chapters in Part Icover cross-cutting issues that provide insights tothe key elements of a successful customs modern-ization strategy. The chapters discuss key organiza-tional issues that any customs service needs to dealwith and focus on the legal framework of customsand the issues of integrity and risk management.The chapters in Part II provide lessons from a selectset of customs reform initiatives as well as from theWorld Bank’s own experience with its support forcustoms reform. The chapters in Part III succes-sively discuss and provide guidelines on a numberof issues that affect customs operation and tradefacilitation. These are customs valuation, rules oforigin, duty relief and duty exemption regimes,transit, security, and the use of ICT.

Each of the 13 chapters begins with a shortintroduction or background section that isintended as a reader’s guide to the issues. This is fol-lowed by an analysis and discussion of the issues,then by the chapter’s main operational conclusionsand recommendations. Some chapters include anannex with a checklist of issues that need to beaddressed in the areas covered. Sections on furtherreading and references follow. The boxes includedin the chapters illustrate specific points or describespecific cases. Case studies are used to illustratepoints made in the chapters; the situation on theground may have since changed. Their usefulnessrests in illustrating that theory and guidelines canbe implemented. Many of these case studies andboxes were prepared by the editors of the hand-book, drawing on papers prepared for this projectand on the literature.

A companion volume titled Customs Modern-ization Initiatives: Case Studies, edited by Luc DeWulf and José B. Sokol, describes in some detail theexperiences and lessons learned from eight casestudies in customs modernization. It complementsthis handbook as it shows how in real life some ofthe issues described here were addressed.

1

Part I

Cross-CuttingIssues

3

1STRATEGY FOR CUSTOMS

MODERNIZATION

Luc De Wulf

TABLE OF CONTENTS

Objectives of Customs Operations 5

Contextual Factors Necessary for a SuccessfulCustoms Reform 7

Development of a Customs ModernizationStrategy 12

Implementation of a Customs ModernizationStrategy 20

Operational Conclusions 22

Annex 1.A Customs Revenue as a Share of TaxRevenue in Selected Countries,2001 23

Annex 1.B Collected Tariff Rates for SelectedCountries by World Region,2001 24

Annex 1.C Time-Release Methodology 24

Annex 1.D Physical Inspection as an Element ofRisk Management 27

Annex 1.E Checklist of Guidelines to Definea Customs ModernizationStrategy 29

Further Reading 29

References 30

BOXES

1.1 Morocco Customs Gets Its Staff on Board forthe Reform Program 17

1.2 An Example of Regional Leadership:The TTFSE Regional SteeringCommittee 21

1.C.1 The Steps to Release Goods fromTime of Arrival 25

1.C.2 The Philippines Time-Release Study:An Example to Follow 26

FIGURES

1.1 Number of Declarations per Staff per year inSoutheastern Europe, 2002 16

Research undertaken in recent years by the WorldBank and others shows that participation in worldtrade tends to boost growth, and that countries thathave integrated rapidly into the world economy alsotended to record the highest growth rates.1 This out-come should not come as a surprise. Integration

brings with it exposure to new technologies, designs,and products. It also enhances competition. Withworld trade growth expanding more than twice asrapidly as growth of world gross domestic product(GDP) over the past decade, the potential rewardsfrom participating in world trade are evident. Suchparticipation is predicated on the availability of goodquality products offered at competitive prices. In thisregard, a trade regime that tenders low protection todomestic producers contributes to the enhancement

1. Rapidly integrating countries experienced annual GDPgrowth three percentage points higher than slow integrators.Integration refers to trade integration as well as openness to for-eign direct investment (World Bank 1996).

of an economy’s competitiveness because it forcesdomestic producers to align their costs with those inthe rest of the world. Nevertheless, an open traderegime will only foster competitiveness when otheraccompanying policies are in place.

Over the past 20 years, average tariffs have beencut by half in developing countries and nontariffimport barriers have been sharply reduced (WorldBank 1996). Yet, for many developing countries, thishas not necessarily led to substantial trade integra-tion. Worse still, the poorest countries in the world,particularly those of Sub-Saharan Africa, lost mar-ket share during the 1990s. Such events were in partbrought about by the failure of developing countriesto produce the types of goods that would generatethe most rapid export growth. Another impedimentwas the maintenance by other countries of a rangeof import barriers to products that Sub-SaharanAfrican countries produce, including agriculturaland textile goods. Import barriers include exportsubsidies, high tariffs, and stringent rules of origin(see chapter 9). The issues of the cotton export sub-sidy granted by the United States and other agricul-tural export subsidies of the European Union (EU)and United States were a significant reason for thedisappointing results of the World Trade Organiza-tion (WTO) Ministerial Conference in Cancun in2003. A poorly functioning trade logistics environ-ment, as well as the combination of factors thatmake up the transaction costs—the cost of clearingcustoms, transport costs, noncustoms trade docu-mentation requirements, and unenforceability oflegal trade documents (World Bank 2003)—alsocontributed to the failure of many developing coun-tries to integrate successfully into the world econ-omy. High transaction costs, of which customsclearance costs are often an important element, maythus nullify the cost-reducing impact of trade liber-alization. Few customs services have managed toprovide exporters with the duty-free inputs neededto keep export prices competitive.2

The realization that customs services could beimproved has prompted many governments todevote substantial energy and resources to modern-ization. They have also mobilized external assistancein this endeavor. In response, bilateral and multilat-eral development agencies have supported manycustoms reform initiatives. International donors orfinancial institutions such as the European Union(EU), the International Monetary Fund (IMF), theInter-American Development Bank (IDB), theAfrican Development Bank (AfDB), the AsianDevelopment Bank (AsDB), the United NationsConference on Trade and Development (UNCTAD),and the World Bank (WB), have all been engaged incustoms strengthening operations. Bilateral donors,such as France, the United Kingdom, Japan, and theUnited States have also been active in providing suchsupport. In addition, the World Customs Organiza-tion (WCO) has made technical assistance (TA)available. A number of customs administrationshave improved their operations by taking advantageof this support. Yet, too many still operate ineffi-ciently, adding considerable costs to trading activi-ties while, at the same time, undermining the growthpotential of their economies.

This chapter outlines the main features of a cus-toms reform strategy and provides operationalguidelines that are likely to contribute to the suc-cess of such initiatives. It has been inspired by theknowledge of good practices; the World Bank’sown TA and project experiences (summarized inchapter 8); the approaches presented in a numberof TA reports that have been produced by diversecustoms experts and institutions, many of whichremain inaccessible to the general public; lessonslearned from several customs modernization ini-tiatives (chapter 7); and consultations with manycustoms officials and consultants who haveassisted in customs modernization initiatives. Thefirst section reviews the key objectives of customsmodernization initiatives. The second sectionspells out a number of contextual factors that needto be adequately addressed at the outset of areform process to enhance its chances for success.The third section defines the key steps in preparinga customs modernization strategy. The next sec-tion elaborates on implementing key issues of thestrategy. The final section provides some opera-tional conclusions.

4 Customs Modernization Handbook

2. A recent study of trade liberalization for a sample of countriesin Africa concluded “It is in the area of providing exporters withaccess to low tariffs and tax-free inputs that the progress of thesample countries has been the most disappointing. The samplecountries had made little progress in implementing timely reim-bursements to exporters of either import duties or value addedtax (VAT) on inputs.” (Hinkle, Herrou-Aragon, and Kubota2003, pp. 82–83.)

Objectives of Customs Operations

Customs administrations are expected to raise sub-stantial revenue, provide domestic producers withprotection, provide supply chain security, preventthe importation of prohibited or unsafe imports(for example, illegal weapons or out-of-date medi-cines), and combat the trade of narcotics throughthe implementation of laws and regulations that arein line with WTO commitments. Customs admin-istrations are expected to accomplish these objec-tives both effectively (by achieving them) and effi-ciently (at the lowest possible cost to the budgetand to the trading community) without compro-mising trade facilitation.

Evolution of Customs Role

The responsibilities of customs continue to evolve.Customs administrations are now increasinglyregarded as “the key border agencies” responsiblefor all transactions related to issues arising from theborder crossings of goods and people. Some ofthese functions are undertaken in close coopera-tion with other national agencies.3 The operationalguidelines of customs cannot give equal weight toall functions constantly; choices and priorities areinevitable in light of changing circumstances:

• Raising revenue has traditionally been high onthe agenda of governments, represented by theMinistry of Finance (MOF), because of the crit-ical importance of import duties as a source ofbudget revenue for many developing countries.Revenues from import duties for a sample ofAfrican countries accounted for just under 30percent of total tax revenue, on average. In com-parison, this share averaged 22 percent for coun-tries in the Middle East, 13 percent for LatinAmerican countries, and 15 percent for Asiancountries (see annex 1.A). While import tariffsare widely recognized as more distortionarysources of revenue than general sales andincome taxes, they remain important for historicreasons, and because they are relatively easy to

collect. Collection of VAT on imports constitutesanother major source of budget revenue. There-fore, a control mentality that ensures that allduties are assessed and paid has permeated cus-toms, irrespective of whether this causes delaysin the release of imports. With tariff ratesdeclining over time, customs revenues as a shareof the total budget revenues have also tended todecline in most countries; but customs revenuesare still a major concern of MOF officials. Thispriority has been reflected in many past customsreforms and TA initiatives.

• Import tariffs are meant to protect domesticproducers, who expect customs administrationsto ensure that all importers pay the officialimport taxes to ensure a level playing field. Onaverage, customs duties amount to 17 percent ofthe total import value in a sample of Africancountries, 12 percent in the Middle East, 10 per-cent in Asia and the Pacific, and 7 percent in theWestern Hemisphere (see annex 1.B).4 Increas-ingly, import tariffs are being seen as an instru-ment of protection rather than of raising budgetrevenue. This is clearly so in developed countrieswhere tariffs provide only a tiny share of totalrevenue and on average represent less than1 percent of overall import value. Import tariffsin developing countries are high, however, thushampering trade among developing countries aswell as the competitiveness of the countries’economies (Ebril, Stotsky, and Gropp 1999).

• Trade facilitation has attracted increasing inter-est in recent years as evidenced by the WTOCancún Agenda and the WCO Revised KyotoConvention. This interest has been broughtabout by an increasing commitment of govern-ments to pursue a private sector–orientedgrowth strategy, combined with increased pri-vate sector assertiveness and demands for bettergovernment services. Cost reductions to thetrader, derived from easier customs procedures,stem largely from the possibility of reducing

Strategy for Customs Modernization 5

3. See, for example, the International Convention on the Har-monization of Frontier Control of Goods (UNECE 1982) avail-able at http://www.unece.org/trans/conventn/harmone.pdf.

4. The IMF estimated these collection rates for a slightly differ-ent sample of countries for 1995. It appears that the rates fellslightly for the sample countries in Asia and the Pacific, but stag-nated and even rose slightly in Sub-Saharan Africa and MiddleEastern countries included in the sample (Ebril, Stotsky, andGropp 1999).

inventories and the amount of operations capi-tal, as well as the possibility for traders to satisfyincreasingly stringent “just in time” require-ments.

• Civil society is demanding better governanceand has identified customs services as particu-larly prone to harboring corrupt practices.Targeting customs for improvements fully rec-ognizes the fact that the integrity situationreflects the integrity of the greater society towhich the administration belongs.

• Over the years, customs administrations havereceived a mandate to protect society. This hasbeen included in the mandate of the WCO, toreflect the notion that most customs adminis-trations are responsible for preventing the cross-border movement of dangerous and unsafegoods. However, the security concern was ele-vated to new heights after the events of Septem-ber 11, 2001. The focus shifted from just importsto the entire supply chain, including exports.New procedures are being introduced and addi-tional safety measures are being prepared andimplemented.

Customs Role and Priorities in the 21st Century

It is difficult to predict the future role of any insti-tution, and there is no one correct or universallyapplicable response to anticipated trends in cus-toms, as each country will respond in ways that arebest suited to its needs, operating environment,national priorities, and cultural heritage. However,some general issues or themes are emerging thatsuggest the future role and priorities of customs.

First, in spite of declining tariff rates broughtabout by successive rounds of trade liberalization,the revenue mobilization and control functions ofcustoms are likely to remain substantial, for severalreasons: (a) the fiscal dependency on customs rev-enues is likely to linger for some time, in light of thedifficulty many developing countries encounter inbroadening their tax bases; (b) imports will proba-bly constitute a major tax base for levying VAT, andcustoms is well positioned to control the goods atthe time of importation; (c) customs will remainthe responsible agency to ensure that goods thatwere imported for other than home consump-tion are not diverted to such consumption; and(d) assessing VAT refunds on exported goods will

continue to require a high level of control overexported goods.

Second, in all countries, customs will continueto collect trade data for statistical and regulatorypurposes.

Third, customs will continue to be responsiblefor effective and efficient border management tofacilitate trade, a major contributor to the interna-tional competitiveness of nations. This will occurregardless of whether trade facilitation is formallyincorporated into multilateral trade negotiations.As such, harmonizing, simplifying, and effectivelycoordinating all national border managementrequirements and commitments will remain prior-ity responsibilities of customs.

Fourth, based on a heightened awareness of thethreat posed by international terrorism andtransnational organized crime, governments willrequire that customs administrations take on alarger role in ensuring national security and lawenforcement. To that effect, customs administra-tions are likely to institute a range of changes to sys-tems, procedures, and even administrative respon-sibilities to increase confidence in the level ofcontrol exercised over both imports and exports.Security checks will increasingly take place at thepoint of export in addition to the point of entry.

For customs administrations to effectively man-age these sometimes apparently contradictoryobjectives, a wide range of new approaches, systems,procedures, and operating methodologies will haveto be developed and implemented. Some of theseare already beginning to emerge and are likely tounderpin the future shape and role of customs:

• The primary focus of customs’ attention willshift from physical control over consignments atthe time of importation to post-release verifica-tion using audit-based controls. This willrequire customs to adopt comprehensive com-pliance improvement strategies designed to pro-gressively increase confidence in the informa-tion provided by traders and in the accountingsystems and processes they maintain. All regula-tory information is likely to be exchangedelectronically, and decisions on treatment ofimports and exports will be made on a riskassessment basis. The compliance record of indi-vidual traders will be a key consideration as willthe exchange of information and intelligence.

6 Customs Modernization Handbook

Such an approach will facilitate the re-engineer-ing of core border management processes andregulatory requirements. It will also involve anew and more coherent relationship withtraders, as well as increased cooperation at thenational, regional, and international levels.

• Countries will increasingly rely on a singleagency to take responsibility for the entireborder management process. This will involvethe merger of a number of different bordermanagement functions under one administra-tive and policy umbrella. In some cases this willbe achieved administratively, and in others vir-tually, through increased cooperation at thepolicy and operational level and through theadoption of information and communicationstechnology (ICT) infrastructure that will allowtraders to discharge all their regulatory respon-sibilities through one single window to thegovernment.

• Moves to ensure more effective coordinationbetween the various government agenciescharged with regulating cross-border trade andachieving meaningful rationalization of regula-tory requirements will require attention at thenational, regional, and international levels.While many different players are involved, itseems likely that customs is the only agency withthe national and international infrastructure inplace to achieve this.

• Customs will increasingly rely on the intensiveuse of modern information technology to pro-vide for seamless transmission of data to allinterested members of the trading community.In the future, most customs administrations willrely on electronic submission of manifests beforecargo arrival, on direct trader input of importand export declarations, and on electronic pay-ment of duties and taxes. Initiatives that haveshown good results so far and that aim at elec-tronically connecting all members of the tradingcommunity, as in Singapore, are likely to spread.This will speed up the granting of regulatory per-missions and enable the collection of statistics.

• Many countries are already members of regionalgroups, a trend that might accelerate in comingyears. Such regional groups might promote har-monization and simplification of customs pro-cedures in accordance with international bestpractice standards. On the other hand, they

create the need for new preferential traderegimes that impose burdens both on customsand on trade, and are prone to abuse.

Contextual Factors Necessaryfor a Successful Customs Reform

Customs reform involves more than the introduc-tion of a set of new techniques for processing cargoand passengers. Customs reform calls for a newawareness of the developments in trade, requirespolitical commitment to push through sometimedifficult measures, and must start with a good diag-nosis of the present situation.

Awareness That Customs Operatesin an Increasingly Globalized Environment

The increases in world trade of recent decades haveplaced increasing demands upon customs.5 In2002, over US$10 trillion worth of goods crossedinternational borders. Every shipment passedthrough customs control at least twice, once onexport and once on import, making customs a keyfactor in the international supply chain and in theglobal economy. Customs needs to adjust to newports of entry and additional hours of service, andtheir job is made more complex by a plethora ofregional and bilateral trade agreements. Frequently,there is no commensurate increase in customsstaffing and resources to keep pace with theincreased workload and more complex environ-ment. Often, customs is not provided with the tech-nological resources to facilitate and secure interna-tional supply chains, to keep pace with the billionsof dollars spent by industry.

Faced with these challenges, many customsadministrations struggle to meet all of thesedemands and priorities. Often, they focus on rev-enue collection and ad hoc priorities that are cham-pioned by the most vocal and influential interestgroups. Some, however, strive to meet these chal-lenges head on, and revisit how their administra-tions are designed and how they function.

In view of customs’ unique position at a coun-try’s borders, its management must satisfy bothdomestic and international constituencies. On theinternational front travelers, businesses, and inter-national air, sea, and land carriers expect services

Strategy for Customs Modernization 7

5. This section relies heavily on Lane (1998).

that are uniform, predictable, easy to use, andconsistent with international standards and con-ventions. Organizations such as the WCO, theWTO, UN Economic Commission for Europe(UNECE), UN Centre for Trade Facilitation andElectronic Business (CEFACT), and UNCTAD haveset standards for the most critical customs func-tions. The most important ones are the following:

• The Revised Kyoto Convention (InternationalConvention on the Simplification and Harmo-nization of Customs Procedures) provides theframework for processing goods in internationalcommerce (chapter 3).

• The International Convention on the Harmo-nized Commodity Description and Coding Sys-tem (referred to as the Harmonized System orHS), which was developed and maintained bythe WCO, provides the framework for classify-ing all merchandise in international trade.

• The Agreement on Customs Valuation (ACV),developed by the WTO, provides the frameworkfor determining the customs value of goods ininternational trade (chapter 8).

• The Agreement on Rules of Origin is the WTOinitiative to develop a system for standardizingthe rules of origin of internationally tradedgoods (chapter 9).

The skills of classifying goods, determining valueand country of origin, and applying proper proce-dures for processing merchandise are needed bycustoms to comply with international conventions,meet the expectations of the international tradecommunity, and achieve the organization’s missionat the nation’s borders. If customs strays, it violatesinternational agreements. Such noncompliancemay result in additional costs and time delays toimporters, exporters, carriers, domestic industries,and consumers. Clearance of goods is affected byfactors such as the quality of port facilities and themultitude of organizations and handoffs involvedin each international trade transaction. Typically,customs is seen as responsible for all delays andwrongdoing at the border, although other agenciesare involved. The international trade communitymay, ultimately, sanction such failures by transfer-ring foreign direct investment (FDI) to other coun-tries where the import–export environment com-plies with international standards.

Implementation of these standards and conven-tions is not a simple task, as illustrated by the argu-ments and debates at the WCO regarding valuationand rules of origin issues. These issues are discussedin some detail in chapters 8 and 9. Also, the com-plexity of the HS may give rise to disputes betweenimporters and customs, due to the fact that the pay-ment of duties depends on the classification in theHS-based customs’ tariff.

As international trade increases and becomes amore important factor in the economy, the im-portance of customs increases and it becomesimperative for customs to administer thesecomplex agreements uniformly, professionally,fairly, and transparently. In performing these func-tions, customs will be dealing with well-trained andwell-compensated professionals possessing inter-national experience who are experts in the areas oflogistics, trade, transport, and law. Multinationalcompanies have invested billions of dollars inrecent years to streamline and secure their interna-tional supply chains. These modern, sophisticatedlogistics systems provide companies with the capa-bility to track, trace, and monitor shipments fromthe factory door to the retail store. However, thephysical and information flows can be severed bycustoms at international borders at the point ofimport or export. A slow, inept, or poorly trainedand equipped customs increases transaction costs,thereby increasing the costs of exported goods tothe industry and consumers, thus making thecountry less competitive. Customs must organizeitself to be a trade facilitator in a rapidly changingworld, as well as an efficient provider of budget rev-enues. This represents a major administrative chal-lenge.

Political Support at the Highest Level

Most customs administrations have operationalresponsibilities under the government policy set bytheir supervisors, including the MOF, and anychange will require strong government support.Demand for reform is unlikely to come from insidethe organization as it may require that drasticchanges be introduced (Holl 2002). That customsstaff are recruited young and often trained in para-military fashion—a tradition that finds its rootsin the fact that many customs officials have lawenforcement responsibilities—also generates an

8 Customs Modernization Handbook

environment that discourages challenging existingprocedures. Proposed changes may require reduc-tions in personnel along with the introduction ofinformation technology (IT) or, in extreme cases,the removal of the top management of customs orof customs officials deemed corrupt or inefficient.Management contracts or contracting with preship-ment service providers may also be proposed.

The focus of the MOFs has always been on rais-ing more budget revenue. This has often led to thestringent control of trade movements, adding coststo both honest and potentially dishonest traders.While reducing corruption and facilitating tradewere always objectives of MOF-led reforms, thesegoals were rarely translated into program detailsand were often set aside in the process of raising rev-enues. These internally driven reforms frequentlybecame stale and failed to instill new ways of dealingwith the old problems. Few have become sustain-able. Hence, outside support for reforms is crucial.

The trading community and civil society oftenlobby for the improvement of services. The tradingcommunity wants to reduce its trading costs andincrease the transparency of its operations whilecivil society wants to eradicate the debilitatingeffects of corruption on social values and economicperformance. As the case studies profiled in chap-ter 6 indicate, private sector pressure groups havefrequently been crucial to fostering customsreforms and monitoring their progress. Politiciansand government officials are more likely to respondwith a firm policy program to local pressure groupsthan to administrative initiatives that are often sus-pected of being self-serving, that easily get lost inbureaucratic posturing, and that often lead to onlymarginal or cosmetic changes.6

The reforms will create winners and losers, andpolitical commitment will be needed to realize theproject. Traders that were accommodated underthe older rules, as well as customs officials thatobtained additional income in “facilitating” tradetransactions or in manipulating import and exportdeclarations to the advantage of the trader, arelikely to object to reform programs that will makethese practices riskier or impossible. Those that

“lose” in a successful reform may be well connectedas either part of the customs administration man-agement or sufficiently close to it to slow down thereform momentum or to influence the design andimplementation of the reform. If not countered,the influence of these individuals will make thereform partial, fragmentary, and ineffective. Tradi-tionalism and lethargy are other factors againstchange. Only a reform that benefits from full polit-ical support at the highest level of government willdeliver its expected outcomes.

Adequate Diagnostic Work

Customs reform is not a case of “one size fits all.”The particular objectives of customs administra-tions and the maturity of their organizations differamong countries. Reforms must be tailored to thesituation at hand. Hence, to fully account for thisdiversity, it is important that any customs modern-ization project start with a careful and completediagnosis of the existing situation. The absence ofgood diagnostic work was identified as a majorshortcoming in the tax and customs administrationprojects managed by the World Bank (Barbone, DeWulf, Das-Gupta, and Hanson 2001), and has beenconfirmed in more recent work, as illustrated inchapter 7. Yet, undertaking a diagnostic exercise incustoms is not an exact science and a flexibleapproach may have to be adopted, with the diag-nostic tailored to the objective of the exercise.There are a number of approaches, tools, andinstruments that can be used.

Enhancing Revenue Mobilization Enhancingrevenue mobilization has frequently been the focusof customs reforms. Diagnostic work has mainlyfocused on measuring revenue leakages. Both theWorld Bank and the IMF frequently use thisapproach.7 The core indicators used to identify theslack in revenue generation include: (a) collectedtaxes over imports compared with potential rev-enue collections to identify the “gap”; (b) share oftotal imports exempted from taxes8; and (c) fraud

Strategy for Customs Modernization 9

6. The late King Hassan II (1961–99) of Morocco championedtrade and customs reform in response to presentations made bythe professional associations that had most to gain from thesereforms.

7. For a collection of excellent articles focusing on the mobiliza-tion of revenues see Keen (2003).

8. These were reported at 18 percent of total imports in a sampleof African countries (Hinkle, Herrou-Aragon, and Kubota2003).

in recording valuation, weight, or rules of origin.Less quantifiable indicators of revenue leakagepertain to the possibility of misclassification ofimports as goods that attract lower tariff rates,as well as vagueness in the Customs Code andregulations that allow customs officials and tradersto make mutually agreeable arrangements. Themethodology of these diagnostic exercises is neitherstandard nor publicly available, but has centered ona pragmatic analysis of customs processes to iden-tify possible improvements. The main participantsin such diagnostic exercises have been MOF offi-cials, including customs. Private sector operatorshave been consulted, but their viewpoint, which isnot maximizing revenue mobilization, is oftenmissing in official reports and reform programs.

Using the World Bank Trade Facilitation ToolkitIn 2001 the World Bank issued a toolkit for theaudit of trade and transport services (Raven 2001).9

This toolkit reflects the practical experience gainedin a series of Bank missions as well as inquiries con-ducted in a number of developing countries, anddraws on a previous publication. It provides guide-lines on how to carry out an audit and analyze andinterpret its findings, and identify remedial actions.The audit consists largely of a series of structuredquestions presented to all participants in the tradetransaction, including customs officials. The re-sponses are to be systematically reviewed undersuch headings as integrity, port management, regu-latory framework, automation, agents’ functionsand attitudes, and so forth. The responses can bedrawn upon to prepare a remedial action plan thatis intended for all participants in the trade chain,including customs, and establishes the conditionsfor success. Clearly, the aim of this toolkit is toreview all operations that can help or hamper tradeprocesses, and this goes beyond customs operations.A full-fledged diagnosis of the various operations ofcustoms will need to draw on other diagnostic tools.The issues pertaining to the administrative environ-ment in revenue mobilization agencies in generalare well treated in “A Diagnostic Framework ForRevenue Administration,” which was designed fordomestic revenue administrations (Gill 2000).10

This framework guided the Bank’s diagnostic workfor the Russian Federation Customs ModernizationProject in 2002.

International Customs Guidelines Prepared bythe International Chamber of Commerce Thefocus of the guidelines of the InternationalChamber of Commerce is clearly on customs(International Chamber of Commerce 2002). Theypresent, in a summary format, the key proceduresthat constitute customs best practices, and assist theanalyst in preparing a systematic comparisonbetween the present state of a given customsadministration and its future operations usingthese best practices. The explanatory notes are use-ful in providing the background for evaluating thepresent system. These guidelines constitute a goodstarting point for any diagnostic study.

Covering the Fundamentals Lane’s CustomsModernization and the International Trade Super-highway (2002) provides another analytical frame-work for the diagnostic work. The proposedapproach also consists of a set of structured ques-tions organized around a logical framework thatcovers fundamentals such as the environment ofcustoms operation, including its expertise andintegrity; enablers such as managing processes,automation, and the ability to analyze data; andadvanced processes such as enforcement, compli-ance and industry partnership, audit and accountmanagement, and risk management. Lane pro-posed a system that would analyze the replies tothese questions and provide guidance on how toformulate an implementation program that wouldensure total compliance and fast release of goods, aswell as reduce the cost of customs operations. Thismethodology focuses on revenue generation,trade facilitation, and efficiency of the customsservices. The questions are formulated through aself-assessment approach, but could also be used byoutside advisers working in close cooperation withcustoms officials.

Pulling Together Key Elements: The WCO Capac-ity Building Toolkit The WCO’s Customs Capac-ity Building Diagnostic Framework is being

10 Customs Modernization Handbook

9. More recently, The International Chamber of Commerceelaborated Customs Guidelines that are consistent with thetoolkit of the World Bank (see www.iccwbo.org).

10. This diagnostic tool also inspired the forthcoming WCOCapacity Building Tool.

prepared in response to requests from WCO mem-bers for a sound methodology that could lead tosustainable improvements in customs administra-tions, particularly those in the developing world. Itaims at bringing together, into one document, thekey elements and foundations deemed necessary toestablish an efficient and effective customs admin-istration. It will be based on the internationallyagreed conventions (Kyoto Convention, ArushaDeclaration, the ACV, and the HS) as well as on theinstruments and best-practice approaches formodern customs administrations. It will advocatefull adherence to these conventions as a guide tothe proposed modernization. The framework willinclude a readiness assessment guide for each of thecore components of a comprehensive capacitybuilding program, and a practical guide on how toconduct diagnostic assessments. It advocates thatthe assessment be undertaken by outside adviserswith the active participation of stakeholders,including local customs officials. It should lead tothe formulation of a prioritized action plan.

Customs Blueprints The European Commissionhas developed a set of 13 blueprints for assessingthe state of customs administrations in accessioncountries. While intended essentially for futuremember states, these blueprints can be used tocarry out a gap analysis in other countries.

Desire to Reduce Trading Costs

Customs reform and modernization initiatives,together with improvements in ports and trade-related institutions, will lead to significant benefitsin reducing trading costs and thus enhancing thecompetitiveness of a country, particularly if theseinitiatives focus on policy reform, technical assis-tance, and modernization of infrastructure. Inthis regard, the World Bank’s Global EconomicProspects 2004 Report (GEP) estimates that if thecountries that are currently below the world aver-age in trade facilitation capacity could be raisedhalf way to the average, trade among 75 countrieswould increase by US$377 billion annually (WorldBank 2003). A recent study estimated that reducingthe cost of international trade transactions by just5 percent by 2006 could add US$154 billion or0.9 percent to the Asia Pacific Economic Coopera-

tion region’s GDP each year (APEC EconomicCommittee 2002). The same report concluded thatcustoms reforms in Singapore, Thailand, and thePhilippines are estimated to yield a US$3.9 billionincrease in real annual income.

In addition to the above estimates, there are anumber of other benefits related to the economicimpact of customs reform and modernization ini-tiatives. In the case of the Trade and TransportFacilitation in Southeast Europe program (TTFSE),for example, there has been a significant overallcost savings for trucks waiting at border crossingpoints or inland pilot terminals monitored throughthe TTFSE since the beginning of the project in2000 (World Bank 2004). At inland pilot terminals,clearance times have, in all the six original mem-bers of the TTFSE, declined substantially. InBulgaria and Bosnia they fell by 60 percent as aresult of procedural improvements, preselection ofdeclarations by a specialized unit, and advance pro-cessing of documents that are submitted by faxprior to the arrival of goods. The cost savings totransporters can thus be calculated based on thereduction in labor costs related to the lower waitingtime and on greater efficiency in using the trucks.The GEP also estimates that every day spent in cus-toms adds nearly 1 percent to the cost of goods. Indeveloping countries transit costs are routinely twoto four times higher than in rich ones. Hence, anyprogram that makes transit operations more effi-cient and reduces clearance times is bound toenhance the country’s competitiveness.

However, increased security arrangements in thewake of September 11 and worldwide worriesabout terrorism have sharply increased the costs oftrade transactions. GEP estimates of the tradeeffects of September 11 show that world welfaredeclined by US$75 billion per year for each 1 per-cent increase in costs to trade from programsaimed at tightening border security.

A number of in-country practices tend to lowerthe benefits that could be brought about throughcustoms modernization. These include resistancein implementing selectivity, lack of cooperationbetween border crossing agencies, excessiveturnover of staff in customs, and minimal progressin addressing corruption. Customs modernizationinitiatives would do well to factor these possiblenegative reactions into the design of the reformprogram.

Strategy for Customs Modernization 11

Development of a CustomsModernization Strategy

A systematic approach to the design of the mod-ernization strategy will enhance its chances of suc-cess. Proper attention to its content—partial orcomprehensive, good sequencing, use of perform-ance indicators, support of stakeholders, availabil-ity of adequate financial resources for implementa-tion, and improved performance of other borderagencies—will substantially benefit the customsreform process.

Modernization Program: Comprehensiveor Partial?

Most diagnoses of customs services will indicategaps between the present state of affairs and thetargeted state of affairs. The next step is to addressthe problems identified. There are various optionsfor proceeding. Should a comprehensive process bedesigned and implemented or should partial orarea-specific measures be taken depending onwhere successes can be achieved and on the readi-ness of the service? No easy answers can be foundthat could fit every circumstance. Yet some guide-lines may be useful.

In practice, many customs reforms have beenattempted using a pragmatic and area-specificapproach. The general objective appears to havebeen to fix some urgent problems without modify-ing the overall functioning of customs operations.These reform initiatives have absorbed substantialdomestic and external resources and have beenmostly directed at strengthening budget revenue.Examples of such reforms are those that have intro-duced advanced IT, brought in a valuation systemin accordance with the ACV, altered the manage-ment for special import regimes to support exportprocesses, and reorganized the managementstructures.

Some of the partial reform initiatives have beensuccessful. However, most observers agree thatthese initiatives have a poor record in terms of sus-tainable improvements to the overall efficiency andeffectiveness of customs operations. Where thereforms were not well integrated into the overallcustoms operations, they had difficulties generat-ing a substantial difference in the area where theoriginal reform was targeted. A comprehensivereform, for instance, is necessary in implementing

any customs-related WTO agreement, includingthe ACV. Also, automation initiatives not placedwithin the context of a comprehensive customsreform left an excessively complex and dysfunc-tional system. Some reforms failed to mobilize thenecessary support of top customs officials, politi-cians, or the private sector—the essential elementfor sustainable modernization. On balance, isolatedinitiatives without comprehensive planning tend tobe piecemeal and appear to be costly and unpro-ductive, even if they pay for themselves in the shortterm. The experience with Bank-supported cus-toms reforms fully supports this observation (seechapter 7).

The alternative approach to customs reform is toprepare a comprehensive reform program, withdetailed, coherent, and well-sequenced steps, and awell-designed financing plan. Such reforms have abetter chance of benefiting from the contextual fac-tors mentioned above. The international donorcommunity, frequently called upon to supportthe reforms, often favors such a comprehensiveapproach and stands ready to assist in phasing inthe various reform components. Such comprehen-sive reform and modernization programs supportstaff training in the new procedures, and allow foradequate time to prepare the legal and regulatoryenvironment, simplify customs processes beforeintroducing an IT program, and call on outsideadvisers and service providers when necessary. Allthese actions can be dovetailed, thus enhancing theprobability of arriving at a mutually supportive sys-tem that achieves the objectives and is sustainableover time. The case studies presented in chapters 6and 7 seem to support this comprehensiveapproach.

Recent World Bank projects show that a holisticapproach to reform can yield substantial results.Such projects are mainly results oriented, take avery pragmatic approach, and tackle the constraintsand issues when and where they are encountered.For example, for a road project that involves bordercrossings, it is important that the various issues thatwould affect these crossings be tackled. Thisrequires the involvement of other agencies in addi-tion to customs. This approach can rapidly mobi-lize support outside the administration, and caninclude other ministries that have the capacity tosupport—or stall—the customs modernizationprocess.

12 Customs Modernization Handbook

Proper Sequencing and Pacing of Reforms

Based on the diagnosis, reformers need to identifyproject components and prepare a timetable fortheir phased introduction. The logical frameworkto detail such a work program is likely to involvethe following steps that can be managed by anappropriate computer software program: identifythe objectives; detail the actions needed to reacheach objective, ensure good sequencing, and iden-tify the time path; establish performance criteria;identify the personnel and budgetary resourcesrequired; identify the individuals to be heldaccountable for implementing these actions; andset up a clear monitoring mechanism for people,instruments, and performance criteria.

Sequencing the reform measures and definingtheir timeframe are critical. These measures need tobe carefully aligned unless delays emerge. Forinstance, when the diagnostic review indicates thatcustoms processes are complex, involve multiplepermissions and signatures, are costly, and delaythe clearance of goods, a total revamping of theprocesses is called for. New processes will need to bedesigned. Implementing them may require that theimport clearance organization be revamped,responsibilities be redesigned, staff be reassigned,and new staff trained. It may also require thatoffices be redesigned to accommodate the ITequipment and reduce the face-to-face contactbetween traders and their representatives, and thecustoms staff.

Only when the new procedures are agreed uponwill it be possible to introduce modern IT supportfor processing trade transactions. A major failure ofIT-driven reforms has been that the sequencingsuggested above has often not been respected. Man-ual and computer-driven processes continue toexist side by side, negating IT’s potential contribu-tion to streamlining customs procedures. However,the introduction of IT takes time as software andhardware choices need to be made, and equipmentneeds to be procured and installed. In addition,staff needs to be trained in the use of the new tech-nology to exploit the data that will become avail-able for policy and enforcement purposes. All thisrequires careful phasing (chapter 13).

Another example that illustrates the importanceof sequencing is one that determines the processsteps required for successful implementation of

risk assessment procedures. When the diagnosisindicates that customs clearing times are pro-tracted, due in part to the practice of physicallyinspecting all containers, risk-based inspectionprocesses become part of the answer. However,100 percent inspection of imports are at timesincluded in the Customs Code and probably stemfrom the view that all importers are equally likely tocommit fraud, and that protecting budget revenuesrequires that all cargo be subjected to the sameinspection process. This practice also maximizesface-to-face contact between importers and cus-toms officials, something that modern customspractices try to avoid. The replacement of the 100percent inspection practice with risk-based prac-tices is one of the key provisions of the RevisedKyoto Convention and one that should be incorpo-rated in customs modernization initiatives. Thiswill require the refinement of risk managementtechniques and adjustment of operational proce-dures (chapter 5).

Program sequencing will need to be geared tothe readiness of customs management and staff. Itis argued that sufficient time must be allowed totrain staff and prepare the ground for the measuresproposed. This view supports a slow and gradualapproach to bringing the staff on board. However,slow implementation may erode the momentum ofthe reform and allow forces that favor the statusquo to mobilize. A middle-of-the-road approach isprobably the best; not too slow so as to not losemomentum, and not too fast so as not to result inreform measures that cannot be implemented orsustained. Local preparedness for the reform asreflected in the diagnostic study, together withpolitical commitment and assertiveness will largelydetermine the desired pace of the reform in anygiven country.

The reform program needs to take into accountwhich measures may be outside the control ofcustoms or the MOF. Compensation policies areoften beyond their reach. At times the diagnosticstudy will show that low salaries in customs consti-tute a major obstacle to staff commitment andgood performance. Customs reform cannot possi-bly alter the overall compensation policy of thecivil service. Customs then is left with a limited setof choices: either do nothing on the compensationpackage or hope that noncompensation measurescan be introduced to motivate staff. One measure

Strategy for Customs Modernization 13

may be to adjust bonus pay, for which some cus-toms authorities have considerable latitude. Amore drastic approach is one that provides for asalary scale in customs that is more generous thanthat being offered in the rest of the civil service.Reality, however, suggests that the effectiveness ofcustoms services, and integrity issues, are unlikelyto be satisfactorily addressed as long as low levelsof staff compensation prevail (chapter 2).

The approach of the Moroccan customs servicewith respect to phasing reforms is interesting.It had available a comprehensive and detailedcustoms reform program that was prepared in thelate 1990s with the assistance of outside consultantsand the IMF. This program was used flexibly,mainly to provide a systematic sense of direction,and served as a general guide for policy reformmeasures that could be implemented. The year-by-year or even the month-by-month reform pro-gram, however, was based on an ongoing assess-ment of what was feasible in light of staff readinessand progress achieved. This approach was sup-ported by a deliberate effort to explain the reformsto the staff, to gain the staff ’s broad adherence tothe reform measures, and to give them credit forthe successes achieved.

Clear Performance Indicators

Performance indicators spell out what the reformprogram aims to achieve and provide a monitor-ing mechanism. The indicators should be designedwith care and attention. The indicators force thereform designers to clarify and quantify the pre-cise nature of the objectives they want to achieve.Effectiveness criteria aim to measure whether theobjective has been fulfilled; efficiency indicatorstrack the cost of obtaining the results. The diag-nostic study should provide baseline data for bothsets of indicators. Comparing the actual observa-tions with the baseline data permits an assessmentof the progress achieved and allows managers toevaluate whether the program is on track or needsto be adjusted. Stakeholders, government deci-sionmakers, and private sector users of customsservices should have access to the evolution ofthese indicators while the reform program is beinginitiated, as well as after. In Morocco, for example,the time-release data is on the Internet andmonthly updates are available for each point of

entry. Such transparency benefits the program andcontributes to its continued support. Obviously,for indicators to remain relevant, they will need tokeep pace with a sometimes rapidly changingenvironment.

Indicators are best used to assess progress overtime. They can also be constructed for a singlecountry or for a set of countries and comparedacross countries to stimulate the ones laggingbehind.11 In some cases, performance targets areincluded as project covenants. To generate theseindicators, the reform program must strive todevelop the statistical capacity to collect the neces-sary data and promptly transfer them to customsheadquarters for analysis. The next sectionsdescribe effectiveness and efficiency indicators thathave proven useful in designing customs reformprograms.

Effectiveness Indicators Revenue generation.Many reforms are designed to improve the revenuegeneration performance at customs. Even ifimproving revenue performance were not thereform’s key objective, the reform’s impact in raisingbudget revenue would be closely monitored byMOF. Examples of such indicators include thefollowing:

• Collected taxes as a share of overall imports or asa share of imports that do not benefit from spe-cial tax concessions for one reason or another.This statistic needs to be carefully adjusted fortariff changes during the observation period.Where possible, this share should be comparedwith the tax revenues that would have been col-lected using the statutory tariff rates to measurethe gap between the actual and potentialrevenue.

• Share of total imports exempted from tariffs andduties, or monitoring of special duty regimesidentified in the diagnostic as prone to fraudand lax treatment.

• Violations detected and revenues received by theTreasury as a result of adjusting the customsduty liability.

• Volume of contested or overdue import taxes.

14 Customs Modernization Handbook

11. The World Bank–funded TTFSE supports trade facilitationinitiatives to Balkan countries. Indicators are constructed foreach country.

Trade facilitation. Examples of trade facilitationindicators include the following:

• The cargo release-time indicator measures timespent processing documentation and releasinggoods to the importer (see annex 1.C).12 Correctmeasurement of time spent processing goodspermits importers to place the blame for slowrelease on the institution responsible—customs,port authority, or government agencies incharge of enforcing agricultural, commercial, orsafety standards. The TTFSE uses this indicatorin combination with the waiting cost for trucksat the border and estimates the savings thatresult from reducing release time. For instance, aproject in Bacau, Romania, reduced clearancetime by 50 percent for an estimated annualsavings of US$106 thousand.13 The TTFSE alsoprovides clear targets for each pilot bordercrossing for this purpose. According toUNCTAD studies of Zaire in the 1990s, theinventory costs to the consignee due to immobi-lization were estimated at 24 percent of totaltransit cost, adding to 6 percent, 3 percent, and 1percent attributable to banking charges, govern-ment controls, and informal facilitating pay-ments, respectively. Not all were due to ineffec-tive customs services, but these estimates give anidea of the costs involved because of delays incargo clearance. See OECD 2003.

• High rates of physical inspection of cargo delaythe clearance of goods, and are also cumber-some, expensive, and provide temptation toengage in corrupt practices. Modern containerstuffing methods are so efficient in economizing

space that once the containers are opened andthe items are extracted for inspection, customsor port and transport staff are often unable toreplace all the contents. This forces the operatorto find alternative means of onward transporta-tion for part of the cargo, in addition to leavingthe cargo vulnerable to damage and theft. InMorocco, the inspection rate fell from 100 per-cent in 1996 to 10 percent in 2003; the target isto reduce it further, to 5 percent. Reducing therate of physical inspection cannot be isolatedfrom other indicators and should be viewed inthe context of risk management. (See annex 1.Dfor a further discussion of this issue.) One wayof doing so is to combine the rate of detection ofirregularity with the rate of inspection. If bothare well done, the detection rate should go up asa percentage of inspection, implying bothimproved trade facilitation and more effectivecontrol.

• The time invested to produce reliable statisticalimport and export data is useful for the pur-poses of analyzing trade developments, and forthe marketing purposes of the private sector.

• The number of import declarations that aremanaged through fast-track procedures for“authorized” importers with good compliancerecords might reflect a selective approach tophysical inspection.

• Public perception of customs operations (tradefacilitation and integrity) as reflected in customersatisfaction surveys can suggest either worseningof or improvement in cargo processing.14

Security and Compliance. The criteria can consist ofthe number and volume of drug seizures; the num-ber of persons arrested, both incoming and outgo-ing (including illegal immigrants); and the rate ofexamination compared to rate of detection.

Efficiency Criteria Efficiency criteria indicatorsaim to measure the cost of delivering the serviceand are more difficult to quantify and interpret. Yetthey are worth compiling because they focus on thegood use of budgetary resources. At the margin,efficiency measures may indicate that improving

Strategy for Customs Modernization 15

12. WCO (2002) provides a methodology to identify the bottle-necks of clearance procedures with concrete figures and to meas-ure the effects of the introduction of new measures. The WorldBank is supporting an initiative to design time-release soft-ware. Automated Systems for Customs Data (ASYCUDA) andother country-designed software provide time-release data. InMorocco, such data are provided for each port of entry and fornormal and special regimes; data are released monthly on theInternet. In Bolivia, time-release statistics derived from theASYCUDA software are prepared for the “Green,” “Yellow,” and“Red” channels and provided for four different phases of the cus-toms clearance process. These results have pointed to the need forfurther process simplification and have also highlighted the lackof staff adherence to new processes (Mendoza and Gutierrez2003). The TTFSE collates data on time release for the pilotsites of several countries and has ensured comparability ofmethodology.

13. See www.seerecon.org/ttfse.

14. The TTFSE program includes an annual user survey ofimporters and truck drivers that measures the public perceptionof corruption and impediments to trade.

effectiveness criteria further may be too expensiveto pursue. These criteria should pertain as much tothe internal costs of customs as to the costs oftraders to adhere to customs procedures. The use ofcriteria to measure the cost for private traders toadhere to trade procedures, including customs pro-cedures, is at its beginning stage. A U.K. organiza-tion, Simplifying International Trade (SITPRO), isextensively testing a methodology to do this.15

Despite a promising start, the initiative is still tooyoung for its practicality to be judged. Results arealso not yet publicly available.

The TTFSE has gone farther than any other cus-toms and trade facilitation program in identifyingefficiency indicators. The indicators include rev-enue collected by customs staff; total revenue costover revenue collected; salaries over revenue col-lected; trade volume per number of staff; customsdeclarations per number of staff; and cost per dec-laration. The results for each country, adjusted forextraneous factors that affect the absolute values ofthese indicators, are good meters for the directionof the efficient use of resources. Comparisonsacross countries may indicate the scope of possibleimprovement, but must be done carefully as manyvariables do affect the absolute value of these indi-cators in each country, which are often beyond thecontrol of the customs services. For instance, theeconomic cost per declaration16 in Albania in 2002was US$24 compared to US$8 in Bulgaria. Thisobviously deserves further analysis before conclud-ing that Albania’s customs services are three timesless efficient than Bulgaria’s. More significant as anindicator of progress made is that these costs weresubstantially higher in 2001: US$33 in Albania andUS$11 in Bulgaria. Similarly, the cost of collectionin 2002 was estimated at 0.85 percent in Croatiacompared to 2.6 percent in Serbia, down from 1.6percent and 4.8 percent in 2001, respectively. A fur-ther example of how efficiency criteria can be com-pared across countries is shown in figure 1.1, whichshows the number of declarations per staff per yearfor 10 Southeastern European countries.

The Role of Strategic Partners

Customs processes affect the interests of a variety ofstakeholders—customs staff responsible for financ-ing government expenditure, other governmentagencies responsible for enforcing regulations per-taining to safety and phytosanitary standards, secu-rity personnel responsible for keeping outweapons, and traders who want to have fast andcheap access to their goods. The adherence of eachof these stakeholders to the customs reform willdetermine its success. Any strategy should carefullymanage relations with each of these stakeholders,bring them on board, and solicit their support.

Customs Administrations Staff The success ofthe reform will stand or fall depending on thecooperation of the staff members or their implicitor explicit rejection of the reforms. They should“own” the reform. Customs staffs are responsiblefor the daily tasks of managing the trade processes.They receive the import declaration, verify the dataprovided, decide whether to physically inspect thegoods, decide on many of the details that determinethe access that exporters have to duty-free importerinputs, and determine the speed with which theseoperations are undertaken, just to name a few.

16 Customs Modernization Handbook

15. SITPRO is a U.K. nondepartmental public body for whichthe Department of Trade and Industry has responsibility. Itreceives grant-in-aid from the Department of Trade and Indus-try. SITPRO is dedicated to encouraging and helping businesstrade more effectively and to simplifying the international trad-ing process. Its focus is on the procedures and documentationassociated with international trade.

00100100

200200

0100

200300400500600

Albania

BiH_Fed

BiH_RS

Bulgaria

Croatia

Yugoslav Republic ofMacedonia

Moldova

Romania

Yugoslavia

Montenegro

FIGURE 1.1 Number of Declarations perStaff per year in SoutheastEurope, 2002

Source: Trade and Transport Facilitation in SoutheastEurope, Regional Steering Committee.

16. Total cost of the customs service divided by the number ofdeclarations.

Because they are the frontline implementers of thereforms, with manifold contact with traders ortheir representatives, they impart an image of thecustoms administration. (See box 1.1.)

Customs clearance activities are the responsibil-ity of customs officers who largely determine howthese activities are undertaken. New procedures canbe provided, automation installed, and integrityproclamations made. However, in the final analysis,the services will only be as good as the staff thatprovides them. For instance, when staffs reject anew IT system, they can boycott or even sabotageits introduction.17 Staffs will tend to buy in to theobjectives of the reform if they understand in detailwhat this means for customs generally and forthemselves as individuals. Resistance to change fre-quently stems from mistrust and uncertainties;thus, staffs need to be brought on board. For exam-ple, when introducing risk-based inspections andstrengthening post-release audits, it will be crucialto show staffs what this will mean in terms of workprocesses, training, and so forth. However, oneshould not expect good information to stop allopposition to reforms, as there will be winners andlosers in any reform process.

Improving overall compensation is critical.When salaries do not cover basic family expenses itis not surprising that staff members might enhancetheir incomes by other, at times illegitimate, means.Recognizing this, several customs reforms havesubstantially enhanced salary levels (chapter 2).

One further example of associating staff closelyto the sometimes controversial aspects of customsreform is the issue of how to make use of the serv-ices of a preshipment inspection (PSI) companywithout creating the hostile or demoralizing envi-ronment that such cooperation often brings. Peruand Mauritania are good examples of PSI opera-tions being broadly accepted by customs staff. Suchcontracts function better if they are negotiated andundertaken by customs administrations ratherthan if they are imposed on customs by the MOFon behalf of the national government (chapter 2).

Ministry of Finance The MOF is an importantstakeholder because of its interest in revenue mobi-lization. Reform must give the ministry confidencethat customs’ revenue generation potential will notbe undermined but enhanced. In particular, com-puterization brings better control over the docu-mentary processing system, and ensures that alltransactions are recorded, thus improving the rateof collection. Customs automation is expensive interms of new software and hardware, improvedcommunications equipment, and staff training. TheMOF would be favorably impressed if presentedwith evidence that automation would accelerate

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 goodillustration of Morocco’s efforts to bring its staffon board.

• Management involved staff in the design ofthe reform initiatives instead of relying on out-side service providers, and consulted staff onoverall customs policy orientations.

• A new Intranet was created to inform staff ofthe details of the reform initiatives and howthis would affect them. The Intranet alsoassisted them in previously complex transac-tions such as vacation scheduling.

• A staff attitude survey was launched andmeasures are being taken to improve areas ofstaff concern.

• Staff members were reclassified according totheir qualifications and the backlog of promo-tions was absorbed.

• The bonus system was streamlined andattempts are underway to gear them moreclosely to staff performance.

• Staff training was revamped and a detailedmanual of procedures was provided online toall frontline staff. A standard schedule of finesand guidelines that give staff greater assur-ance in their discussions with private sectortraders was also posted online.

Source: Steenlandt and De Wulf 2004.

17. This has occasionally happened with the introduction ofcustoms information systems—communications cables disap-peared overnight and power cuts affected computerized datacapture at border locations (Central Europe), computer equip-ment was destroyed (Bangladesh in early 1990s), databases andcomputers were stolen (Africa); at one location the roof of thecomputer room was broken to let rain ruin the IT equipment.

customs clearance and thus portray a good image tothe outside world and attract FDI. However, whatwill convince the MOF to free up adequate budget-ary resources will be the assurance that revenue per-formance will be enhanced. One example is pro-vided by the Philippines, which freed budgetaryresources in 2003 because of the expectations thatthe reforms would lead to substantially higher rev-enues (Bernardo 2003). Also, the MOF will sub-scribe to selective physical inspection of cargo onlyif it is convinced that the post-clearance audit func-tions are carefully designed and carried out. Thesame argument applies to the strict implementationof the ACV.

Private Sector Stakeholders Traders are themost likely supporters of customs reforms. Theyare the first to benefit from more transparent andspeedier processes and are also the first to complainabout ineffective and costly services. Engagingthem during the reform design and implementa-tion and keeping them informed of its progress iscrucial. Professional associations have considerablepolitical clout that not only can be mustered toensure that the budget provides the necessary sup-port, but also can be used to pressure other govern-ment agencies to align their performances to that ofimproved customs performances. The private sec-tor can also monitor progress and direct its focus totrade facilitation objectives. It may assist financiallyin the implementation of the reforms because it isamong the first beneficiaries, as was the case in thePhilippines and Turkey. In return for this support,the private sector can be formally consulted onreform initiatives that would be of particular inter-est. In Southeast Europe, “PRO-Committees” wereestablished in every country, under the South EastCooperation Initiative (SECI) and Stability Pactumbrellas.18 They regularly review facilitationissues, make recommendations for changes, andlobby the appropriate government agencies.

In the Philippines, under the World EconomicForum (WEF) initiative, private sector contactswere formalized with the creation of a Local Stake-holders Steering Committee that works closely withthe Bureau of Customs (BOC) on behalf of civil

society. The committee has an oversight respon-sibility over the implementation phase of thereforms. A first outcome was the donation bythe semiconductor and electronics industry of thehardware, telecommunications link to the BOC sys-tems, and front-end computers for its AutomaticExport Documentation Systems. In Ghana, the cre-ation of the Ghana TradeNet (GCNet) benefitedfrom close private sector participation. In Turkey,the private sector built a number of border postsand operated them under the Build, Operate, andTransfer model.

However, not all private sector operators willfully support reforms. Clearly some derive advan-tages from the opacity within which customs oper-ations take place. Through bribery, private sectoroperators are at times able to reduce their importtax burden, thus diminishing the benefits theyexpect to derive from a more transparent and fasterrelease system. In this connection, Pakistani textileand garment exporters did not support the intro-duction of transparent methods to calculate draw-back refunds, as this would eliminate subsidiesembedded in the old refund system (OECD 2003).

External Advice

There is much expertise worldwide in managinggood customs services. Donors are eager to offeradvice because improving customs services has ahigh priority in their assistance programs. Multilat-eral and bilateral institutions, as well as private con-sulting firms, are active in this area. Often, the coor-dination of such advice is inadequate. Customsadvisers, coming from a variety of organizations,are frequently unaware of earlier advice given onthe same subjects that they are called upon to con-sider. At times their advice is repetitive or, worsestill, contradictory or inconsistent, thus ensuringthat it will either be ignored or poorly applied.Obviously, a country may wish to ask for advice onthe same topic from various sources as part of adeliberate strategy, but would often gain if it wereto coordinate such assistance more carefully. More-over, rather than being demand driven, thesecapacity building activities are often driven by thedonor’s own agenda for geopolitical reasons or forthe sake of spending a budget to secure next year’sallocation. Such support should be mobilized and,more importantly, coordinated by customs.

18 Customs Modernization Handbook

18. PRO-Committees consist of representatives of the privatesector and the administrations involved in the cross-bordermovements of goods.

Often, TA is provided under projects aimed atthe broader trade or transport development agenda.World Bank support has been framed in the contextof civil service reform (Bolivia), export promotion(Bangladesh), revenue mobilization (Lebanon),or trade and transport facilitation (TTFSE inthe Balkans). However, other support operationsfocused single-mindedly on customs reform (sup-port for Russia customs, chapter 7). While the Bankis organized to lend to individual countries, therehave been initiatives where a series of country proj-ects were combined under a regional program (theTTFSE program, for example). This has resulted ineconomies of scale, closer regional integration, useof peer pressure to promote reforms, and sharing ofbest practice models. It has also proven to be a cost-effective way of channeling technical assistance.

The IMF has a long tradition of supporting cus-toms reforms (Keen 2003). The IMF makes diag-nostic assessments available, and assists govern-ments in the preparation and implementation ofreform strategies by providing long-term residenttechnical assistants. The WCO has placed at the dis-posal of member countries an arsenal of capacity-building initiatives, while the WTO provides sup-port for introduction of the ACV. Bilateral agencieshave also been active with advice and by stationingcustoms experts in developing countries forextended periods of time.

Providing TA is expensive, not only for thedevelopment agencies involved, but also for therecipient countries that often have to contribute tothese assignments and allocate staff in support ofthe TA. There are indications that some of thisassistance has not been sustainable, in part becauseof a failure to effectively transfer knowledge, orbecause what was transferred became inapplicablebecause customs was not receptive to the changesproposed.19 Developing countries and develop-ment agencies owe it to themselves to periodicallyconduct critical reviews of the impact of their TA,particularly in terms of sustainability.

Financing Plan

A full-fledged customs reform that includesautomation upgrades and communications infra-

structure is expensive. World Bank projects haveoften moved into the tens of millions of dollars andeven to more than a hundred million. Reformexpenditures should ultimately be self-financingthrough the improvement of revenue mobilization.However, some expenses are exceptionally heavy atthe outset of the reform, particularly those relatedto the IT component of a project. Foreign financingfrequently covers these.

Maintaining and upgrading IT equipment isexpensive, particularly in light of the short andshortening IT cycle. When financing to maintainand upgrade IT equipment is not adequatelyincluded in future budgets, it undermines the effi-ciency of the initial investments. In the Philippines,hardly any maintenance expenses were appliedafter the installation of the IT equipment. The fre-quent outages experienced led to severe service dis-ruptions and revenue loss, equivalent to severalmillion dollars. The envisaged overhaul will bemore expensive and disruptive of operations thanperiodic maintenance and upgrading would havebeen. Similar situations have occurred in othercountries. The key lesson from the experiences of anumber of countries is to build relations with theinternational institutions that can contribute tofinancing the large up-front costs, and to preparethe budget authorities for the significant annualbudget allocations required for the upkeep of theIT infrastructure.

Collaboration with Other Government Agencies

Trade relies on the services of a large number ofagencies and service providers, who are all partici-pants in the trade logistics chain. Hence, a reformlimited only to customs will be substantially lesseffective than if other agencies and serviceproviders were to enhance their performance too.At times, several agencies responsible for qualitystandards undertake separate inspections and takesamples to ensure that imports conform to localquality standards. This can add substantially to thecost of imports. A study found that, at least untilrecently, import verification and standards inspec-tion (applied to 50 percent of all imports) in Egyptcould add 5 to 90 percent to the cost of imports.These costs could have been drastically reduced if,among other reforms, the Egyptian standardsagency General Organization for Import and

Strategy for Customs Modernization 19

19. For instance, seminars on WTO valuation requirements arenot effective if the customs organizations the participants comefrom are not equipped for the required changes.

Export Control would have accepted quality certifi-cations delivered by accredited certification compa-nies and if local quality standards were aligned tointernationally recognized ones. (See Nathan Asso-ciates 1998 and 1996.) The agency in charge ofnuclear safety is also frequently involved, as are thesecurity forces, which at times insist on participat-ing in each and every physical inspection of cargo.In some cases, border police officials insist on eitherselecting the consignments for inspection by cus-toms on the basis of criteria unrelated to customsrisk management, or re-inspecting every shipmenton the grounds of “fighting corruption in customs”(which should be dealt with in another manneranyway), or “combating smuggling” (which is nottheir mandate). Transport agencies, ports, and air-ports often also represent weak links in the logisticschain.

In theory, there is no reason why these differentagencies, each with their own legitimate concerns,could not join forces with customs in applyingadvanced risk profiling methodologies to reduceintrusive inspections. The methodology wouldinvolve selecting a limited number of shipments forinspection, focusing on those that present risks,and releasing the others rapidly. In the process, themethodology would institute an effective post-release audit control. (See chapter 5.) In developingcountries there are no examples of such coopera-tion yet, but the approach is gaining ground in sev-eral transition countries (Serbia for example).There is also evidence that discussions betweencustoms and these other agencies are often stalledby jurisdictional rivalry.

Efficient customs operations also depend on agood legal environment and on the way judgmentsare rendered and enforced, on a banking systemthat can provide guarantees and ensure timely pay-ments, and on port and warehouse services thatoperate efficiently if the improvements in time-release that result from customs reforms are notswamped by inefficiency on their part. In addition,a good communications system is needed to inter-connect the various customs offices, and to permitthe gradual integration of the various participantsinto the trade transaction through the implementa-tion of the “single window” concept. The advancesmade by Singapore and Mauritius in effecting suchintegration under the TRADENET initiative (alsobeing rolled out in Ghana and planned for intro-

duction in Cameroon and Tunisia) clearly illustratethe efficiency gains to be obtained by connecting allparticipants in one tight system.

Probably the best way to involve these otheragencies in customs reforms is to cast the reformwithin the broader context of trade and competi-tiveness reforms. Customs rarely takes charge ofsuch reforms, but constitutes a core agency and canplay an active role in outreach to other agencies. Inany event, with many agencies involved, the reformprogram should be a genuine government pro-gram, rather than a customs or MOF program. Itshould be one that attracts attention and activeleadership from influential members of politicaland civil society. In the absence of such leadership,the benefits of a customs reform will be more lim-ited than the economy deserves.

Implementation of a CustomsModernization Strategy

Implementing a customs modernization strategyrequires authority, dedication, progress monitor-ing, and adjustments to the strategy to take accountof progress achieved as well as lessons learned.These elements are not different from those thatform part of the implementation process of anyother reform. A few brief suggestions may be inorder.

Leadership

Dedicated leadership will help to ensure that thereform remains on the agenda of the various poli-cymakers inside and outside customs. With thesubstantial workload and diverse emergencies thatcustoms managers often have to deal with, it maybe best to assign the management of the reformprogram to a dedicated customs official, assisted bya small team of experts. However, it is always theDirector General of Customs who should take thelead, with strong support from the government.Foreign technical staff could become part of thisreform management team, but should not take aleadership role except in special circumstances.Their role should be to transfer knowledge, notto implement change. The practical shape of thedirect leadership position needs to adapt to localcircumstances. Those given this assignment shouldbe recognized inside and outside of customs for

20 Customs Modernization Handbook

their integrity and expert knowledge of customsoperations, should benefit from the backing of topcustoms management, and should have directaccess to management. They should also ensureoutreach to the other stakeholders (box 1.2).

Flexible Implementation

The implementation plan is the key tool for moni-toring the reform process. It will have a detailedtimeline for implementation of the proposedactions and will identify individuals to be heldaccountable for keeping to this timeline. Keepingthe program on track requires the various steps tobe monitored, implementation problems to bedetected early on, and corrective actions taken asnecessary. Progress should be regularly communi-cated to the head of customs, to the MOF, and tothe Cabinet. Flexibility will be required, becauseplans never work as scheduled and the unforeseenmust be dealt with swiftly. The management teamwill need to be given sufficient flexibility to reallo-cate resources or to have rapid access to managersthat have the authority to do so. Effectiveness indi-cators and efficiency criteria play a crucial role in

this course of action because they focus on achieve-ments rather than processes.

Involvement of Stakeholders

Much is to be gained by keeping in close communi-cation with all stakeholders to ensure that thereforms respond to their initial objectives and donot become part of the routine work of customs.Periodic and well-prepared assessment meetingsthat are open to all stakeholders should take placeto inform stakeholders of progress made, problemsencountered, and measures proposed to addressslippages and changed circumstances. A periodicstakeholder survey should be conducted to assessstakeholders’ satisfaction with the results of thereforms. This is the approach utilized by Morocco,which annually undertakes a survey, publishes itsresults, and reports on the measures that customsmanagement promises to undertake to addressissues. In Southeast Europe, there is an annual usersurvey designed to measure user satisfaction, evalu-ate the level of corruption, and, in conjunction withthe border performance indicators, validate andcompute average costs and delays along the majortransport corridors.

Strategy for Customs Modernization 21

BOX 1.2 An Example of Regional Leadership: The TTFSE Regional SteeringCommittee

All the countries that borrowed from the Bank tosupport their trade and transport facilitationprojects aimed, under a memorandum of under-standing signed in Skopje in 2002, to establish aRegional Steering Committee (RSC). The objec-tives of the RSC are to:

• exchange information on border-crossingoperations

• review and consider obstacles to trade• provide a forum for sharing results• monitor pilot site operations and promote the

establishment of local cross-border customsand border agency committees

• cooperate with national and regionaltrade professional committees (the “PRO-Committees”)

• consider policies and measures to implementinternational standards in relation to customspersonnel (that is, the WCO’s Arusha de-claration)

• exchange information on national strategies,including action plans, and review progress

• consider new applications for access to theTTFSE.

The RSC now meets twice a year. Each coun-try is represented by a National Coordinator,who can be either the Minister of Finance, or theDirector General of Customs. When the NationalCoordinator is the Director General of Customs,he or she is mandated by the government tospeak on behalf of all other border agencies.

The RSC can also establish specialized work-ing groups (for example, IT exchanges of data),and can organize regional actions (like the jointU.S. Customs—WCO workshop on risk manage-ment in September 2003, or a self-assessmenton integrity, based on the WCO methodology,in the fall of 2003).

Source: Michel Zarnowiecki, The World Bank.

22 Customs Modernization Handbook

Operational Conclusions

Customs reform has absorbed large amounts ofdomestic resources from reforming countriesas well as TA and financial assistance from theinternational donor community. A number ofobservers do, however, agree that in many develop-ing countries customs administrations are in needof further modernization and reform to delivereffective and efficient services. Countries need toachieve adequate customs service standards if theyare to contribute to the competitiveness of theeconomy, expand exportation activities, and attractFDI. The main messages of this chapter can besummarized in the following points:

• Good customs operations consist of coherentand interlocking sets of processes. Partialreforms can improve some aspects of the serv-ices, but sustainable progress will only beachieved when the reform positively affects thevarious key elements of the customs processes.Coherence of the reform will be undermined ifcrucial parts of the customs processes continueto operate under the older, dysfunctional sys-tems. For instance, implementing the ACV,without at the same time having a good post-clearance audit system in place, will not work asintended. Reform projects that overly stress theimplementation of advanced IT without priorstreamlining of the trade processes themselveswill likely fail, too. (Annex 1.E provides a check-list of issues that deserve attention in preparinga reform strategy.)

• Good diagnostic work is essential in identifyingthe shortcomings of the existing system, indefining the main strategies of the proposedreform, and in mobilizing support.

• The reforms should be “owned” by customs,whose responsibility it is to ensure the coherenceof donor support; such support must be seen astemporary and must be delivered in such a way asto contribute to the sustainability of the reform.

• The reforms must be realistic. They mustconform to implementation capacities and tothe support they receive at the political level.Many experts know how a good customs serviceshould be run. The art is in drawing on thisexpertise and preparing an ambitious butpragmatic reform program that will enhancethe effectiveness and efficiency of customsoperations.

• Customs reforms need the leadership of cus-toms’ top management, as well as the support ofcustoms staff and other stakeholders. Whilean ownership approach by customs officials iscritically important, it is equally critical to bringall stakeholders on board at the planning stageas well as at the implementation stage of thereforms. Stakeholders’ voices need to be heardand the program needs to address their con-cerns. Both the MOF, with its concern for rev-enue mobilization, and the private sector,with its concern for trade facilitation, should beintegral partners in the customs reform process.Efforts to make them outspoken supporters ofthe modernization efforts are likely to provebeneficial.

• Political support for customs is essential for thereform’s success. Reforming trade processes willchallenge the status quo, where benefits are pro-vided to some, inside and outside of customs.Opposition to the reform program is to beexpected. In some cases opposition will take thepolitical route, in others the boycott route. Onlysupport at the highest level will enable customsmanagement to overcome anticipated obstacles.Customs managers will need the explicit sup-port of the political leadership as well as accessto top leadership.

• Using clear performance indicators to monitorthe progress of the reform is essential, not onlyto evaluating progress, but also to adjusting thereform measures to changing circumstances,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 SelectedCountries, 2001 (percent of total tax revenue)

Region or Country Region or Country

Africa 28.7 Middle East 22.3Botswana 37.2 Bahrain 41.4Burundi 18.4 Egypt 20.0Cameroon 31.6 Iran, Islamic Rep. of 18.4Côte d’Ivoire 27.6 Israel 0.9Ethiopia 29.3 Jordan 20.4Gambia, The 44.5 Kuwait 71.5Kenya 16.8 Morocco 20.1Lesotho 22.8 Oman 10.4Mauritius 32.8 Pakistan 15.4Rwanda 30.3 Syrian Arab Rep. 11.7Sierra Leone 49.8 Tunisia 15.4South Africa 3.0

Western Hemisphere 13.3Asia and Pacific 14.9 Argentina 8.0Fiji 22.7 Bahamas, The 50.1India 24.1 Bolivia 6.9Indonesia 4.7 Brazil 5.8Myanmar 7.2 Colombia 8.5Papua New Guinea 24.2 Costa Rica 6.6Philippines 19.6 Ecuador 11.8Sri Lanka 12.7 El Salvador 10.0Thailand 3.9 Guatemala 12.4

Nicaragua 10.5Panama 20.2Paraguay 17.5Peru 12.8Uruguay 4.1Venezuela, R. B. de 12.9

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

24 Customs Modernization Handbook

20. This appendix was written by Gael Raballand, Economist,Trade Department, World Bank.

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

Papua New Guinea 14.6 Panama 8.1Philippines 6.0 Paraguay 6.1Singapore 0.2 Peru 9.3Sri Lanka 4.9 Uruguay 4.3Thailand 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 wereused 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-ReleaseMethodology

One of the most widely used performance indica-tors to measure customs effectiveness is the time ittakes for customs to release goods.20 For many

years, customs reforms were launched withoutproper assessment of their impact. Various customsauthorities publish their release times and theWCO has issued a methodology to measure releasetimes so that the findings are comparable acrosscountries.

The chain of processes that imports go throughfrom the time of their arrival in a country to theirrelease can be shown in 11 discrete steps

(box 1.C.1). This articulation may differ somewhatamong countries, but almost all the events are pres-ent in every country. The type of goods beingimported also has an effect on the process beingfollowed.

Measurement of time release is a worthwhileexercise as it can establish a pre-reform benchmarkand thus help in assessing progress made by mod-ernization initiatives. In addition, it permits com-parisons across countries, but only if the methodol-ogy adopted is identical.

Two different approaches can be taken regardingthis issue: an overall trade logistics perspective anda more customs-oriented perspective.

The Trade Logistics Perspective

From the overall trade logistics perspective, it isimportant to take into account the whole process.Indeed, from an importer’s point of view, it is theoverall time that the goods are detained beforerelease that affects the transaction costs. The meas-urement should consider the time duration fromarrival of the goods into the border post until theyare physically released. This would measure theeffectiveness of all operators involved in this trans-action, including port authorities, warehouse man-agement, control agencies, brokers, customs, thebanking sector, and so forth. Such an analysis wasundertaken in the Philippines, Japan, and in the

context of the TTFSE (Trade and Transport Facili-tation in Southeast Europe) program.

Without distinguishing the causes of the delay inthe release of goods, the TTFSE, for instance,adopted a “black box” approach, measuring thetime releases from arrival to physical release. Thisallows data to be compared across different coun-tries in Southeast Europe, but is best used to com-pare performance over time in a given country orborder station. This effectiveness measurement wascomplemented by other indicators that measuredthe efficiency of customs operations such as therevenue collected per staff and the number of dec-larations per staff.

Another approach for obtaining data on tradefacilitation is through firm surveys. Such data aregenerally less reliable as they reflect subjective opin-ions about time release rather than objective meas-urements. As a result, a large standard deviationamong respondents results. Moreover, due to thecosts of conducting this type of survey, they areonly available from time to time without any realpossibility of comparisons over time. One exampleof this type of study is the World Business Environ-ment Survey.21

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 goods2. Unloading of the goods3. Delivery to a customs area, where goods are generally temporarily stored yes4. Lodgment of the declaration yes5. Payment of duties and duty discrepancies (can take place after step 9) yes6. Acceptance of the declaration yes7. Documentary control yes8. Physical inspection yes9. Control of other agencies such as standards or phytosanitary

10. Goods released by customs yes11. Actual removal from the port, airport, or land border post premises

Source: Author.

21. The World Business Environment Survey is the only largesource regarding firm surveys’ time-release data. A large-scalesurvey of more than 10,000 firms was conducted in 80 countriesin 1999–2000 on many aspects of the regulatory environment(World Bank 2002).

The Customs-Oriented Approach

The time-release study could detail the time it takesfor each of the steps identified in box 1.C.1 forwhich customs bears the sole responsibility. Such astudy would suggest where bottlenecks exist andhow they can be eased by actions and initiatives inwhich customs has primary authority.

Some estimates of time release related solely tocustoms are available, but they cannot be fullycompared across countries because of methodolog-ical differences in their compilation. This is gener-ally due to the local nature of customs proceduresand a lack of harmonization of the measurementmethodologies. For instance, in Bolivia, time meas-urement starts when the declaration is lodged inthe ASYCUDA system even if the broker could havearrived many hours earlier and may have tried tosubmit his declaration, but with errors. In the caseof the Philippines, the first step measured is “thearrival to lodgment,” which includes the unloadingas well as the processing and issuance of the importpermit by noncustoms agencies. This step is, by far,the longest step in the Philippine procedure: 60percent of the total release time in the case of sea-port and 72 percent in the case of airports is takenup by the time lapse between the arrival of thegoods and the lodgment at customs. It is unclearwhether this delay is due to port inefficiency or toother controlling agencies’ involvement.

To disentangle the responsibility of variousactors within customs, one could measure the time

between the different customs-related steps. Topromote standardization of these measurements,WCO issued a guide to measure the time releaseand the World Bank, in partnership with WCO, isdeveloping software that will provide an objectivebasis for this measurement (WCO 2002). The newsoftware is expected to be fully compatible with thevarious automated customs management systemscurrently in operation. This tool should permit themeasurement of time-release data in a manner thatwould be fully comparable across countries.

Some Illustrative Results

Time release may differ among different types ofproducts, depending on what control agencies areinvolved, port of entry (airport or seaport), coun-try of origins, and which verification channels(green, yellow, or red) the goods are assigned toafter risk analysis has been performed. The wholelogistical process can be assessed, and detailed cus-toms-oriented information can be compiled.

In the case of the Philippines, the study calculatesrelease time for goods that enter using differentverification channels (green, yellow, and red lanes),broad commodity classifications, commodityvalue, country of origin, arrival location (port orairport), mode of payment, VAT exemption, exemp-tion from payment of duties, lodgment days, modeof lodgment (electronically or not), and period oflodgment (UPECON 2003). (See box 1.C.2.)

26 Customs Modernization Handbook

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

The Philippine customs authority has publisheddetailed data on time release. The study distin-guishes differences along selectivity status (colorlanes), commodity class, commodity value,country of origin, arrival location (port or air-port), mode of payment, VAT-exempted or not,exemption from payment of duties, lodgmentdays, mode of lodgment (electronically or not),and period of lodgment within a day.

In most cases, intuitions were confirmed. Forinstance, time release in ports is longer than inairports, and textile products and motor vehiclesare cleared faster than food items (102 and 109hours respectively, compared to 119 hours,probably because of the intervention of controlagencies).

This type of study can also raise issues for fur-ther inquiry. For instance, by country of origin,Chinese goods should take longer to releasethan goods imported from ASEAN countries dueto the fact that most Chinese goods enter thered lane and there is preferential treatment forimports from ASEAN countries due to member-ship in the Asian Free Trade Association (AFTA).On the contrary, it was found that the time toclear goods from ASEAN countries is longer thanfor goods coming from China (136 hours com-pared to 98 hours). The total customs process-ing time was shorter for Chinese goods in com-parison with ASEAN goods (23 hours instead of35 hours).

Source: UPECON 2003.

Several other studies suggest that time releasediffers for different types of products. For agro-products, time release was almost 40 percentlonger when controlling agencies (other than cus-toms) are involved. The port of entry also affectstime release as airports are usually better organizedthan seaports, and can handle different categoriesof cargo that tend to make cargo clearance lesscomplicated. In the case of Tema port in Ghana, itwas calculated that 44 percent of the clearancesoccur within two days whereas at the airport 90percent of the goods were cleared in 24 hours. Evenamong ports in the same country, time release candiffer. In Morocco in September 2003, it wasreported that the average time release was 31 min-utes at Tangier port, but 50 minutes at Agadir port(Morocco government). In Bolivia, it was assessedthat between the most efficient border post (Pisiga,at the Chilean border), and the least efficient(Yacuiba, at the Argentinean border), the averagetime release was almost 30 times lower in Pisigathan in Yacuiba (Mendora 2003). On the basis ofthis study, customs authorities identified someadministrative measures to streamline the processin some border posts.

The Bolivia study also identifies differences inclearance time by the types of inspections to whichgoods are subject. After lodgment declaration, threepossible actions have been defined: green forimmediate release, yellow for documentary control,and red for physical inspection of goods. From asurvey conducted from January to June 2003, aver-age time release for a cargo assigned to the greenlane was 39 minutes, 49 minutes for the yellow lane,and 71 minutes for the red lane.

Conclusion

Time-release data represent a powerful perform-ance assessment tool that enable the measurementof the effectiveness of customs services and themonitoring of progress.

They permit the creation of a detailed diagnosticof the time it takes to process goods and an exami-nation of differences across different types of com-modities, ports, and import regimes. They may alsocontribute to the monitoring of the impact of anycustoms reform. In addition, they can help to iden-tify potential corrective actions.

Annex 1.D Physical Inspection asan Element of Risk Management

There is a tendency in recent customs projects touse the rate of physical inspections as a short-hand indicator for trade facilitation. Doubtless,the trading community likes this indicator andwants to see it drop, as physical inspections can beintrusive, time consuming, and costly. Yet, the rateof physical inspections should only be thought ofas a valid performance indicator when consideredin the wider context of risk management used onthe part of customs. At the margin it is possible tohave no inspections and maximum trade facilita-tion, at the cost of serious revenue erosion. Thisannex provides some further clarification on theuse of risk management in the context of physicalinspection of cargo, and can also be read as acomplement to chapter 5. A fuller treatment ofthis subject can be found in the WCO RiskManagement Guidelines that can be found atwww.wcoomd.org.

The rate of physical inspection is only one of aset of risk containment strategies and should beevaluated in the context of other strategies such asanti-smuggling, valuation, or rules of origininspections. While physical inspection plays a rolein these strategies, much of the risk containmentstrategy will depend on other customs interven-tions, many of which can take place after the goodshave been released.

The rate of physical inspection may be useful asa performance indicator if applied in conjunctionwith the performance of revenue mobilization. Areduction in the rate of physical inspection thatcoincides with a stable or improved revenue per-formance suggests that trade facilitation (impliedby the lower inspection rate) did not come at theexpense of revenues. It suggests that the inspectionrate is targeted at the most risky shipments and iswell executed, involving more than just opening thetailgate of a container. Inspections, of course, canbe better conducted if they are fewer and under-taken by better-trained staff.

Selectivity in Physical Inspection

The use of selectivity for cargo inspection is only anapplication of the general principle of selectivity incontrol at the border, for documentary control, or

Strategy for Customs Modernization 27

for post-clearance audits. The principles involvedare the same and consist of establishing a combina-tion of risk indicators, weighing them, and, finally,applying them systematically to trade transactionsto select those transactions that are to be subjectedto a particular type of control. This combination ofrisk indicators can be called a risk profile.

The quality of the risk profile depends, ofcourse, on the data that are used to draw up theprofile. Intensive use of IT and data mining has, inrecent times, greatly enhanced the possibility ofpreparing relevant profiles. Modern IT can period-ically update the risk profiles of transactions toensure that profiles adjust to changes in trade pat-terns or to seasonality (for example, in Morocco therisk profile is adjusted during periods prior toRamadan when large amounts of luxury foodproducts are imported). However, these profilescannot be better than the data on which they arebased. These data are drawn from customs declara-tions (HS, value, origin), tariff rates, and inspectionresults. Only when these data are available can asystematic risk profile be established. Even then, theincidence of smuggling and bribery are not repre-sented in these databases, suggesting the data’s lim-itations. Many customs administrations do nothave these data or do not have them in a formatthat can be extracted properly.

Risk coefficients for particular shipments aredetermined by, among other factors, the classifica-tion of goods, origin of the goods, the tradersinvolved, and the mode of transportation. Certaintariff lines attract high duties and there is a riskthat traders will record erroneous classification orundervalue the goods to reduce their duty liabil-ity. Some goods originate in countries that attractpreferential rates, prompting some traders to fakethe origin of their imports. Some countries of ori-gin or transshipment have a record of providingfraudulent, or doctored invoices. Some tradershave a documented track record of infractionswhile others have given proof of good fiscalbehavior and have no or minimal recorded viola-tions of the Customs Code (authorized traders).Customs can apply this computer-generated riskprofile to individual shipments and assign a riskcoefficient on a scale of 0 to 100. Zero means thatthe transaction involves no risk to any of thecustoms objectives and 100 means that the trans-action is certain to contravene some regulatory

provisions. Ratings in between convey the degreeof risk of the transaction to customs objectivesand alerts customs to the degree of care that isrecommended to minimize these risks. A refinedsearch of the risk coefficient can also provide themain reason for the particular risk coefficientrating and the particular control that should beactivated. Such controls may include physicalinspection.

Using the IT system, customs can gear its level ofinspection to the risk that it is willing to accept inclearing goods. If customs decides that it can accepta 5 percent risk that the goods violate a regulatoryprescription, only those transactions that themodel suggests would exceed this level of risk willbe inspected. Analysis and experience will suggestwhat overall level of inspection this entails. Witheverything else constant, striving for lower levels ofinspection implies accepting higher degrees of risk.These tradeoffs can be calculated using modern ITsystems. The model that activates the transaction-specific selectivity decision can be easily made tointerface with the existing automated customsmanagement systems, hence making the applica-tion of risk management techniques a matter ofcustoms routine.

Evaluation of the Selectivity Model

The performance of the selectivity model should bemonitored and evaluated on an ongoing basis. Thisimplies that the inspection reports would be vali-dated and systematically entered into the IT systemand compared to the inspection reports of transac-tions selected on a random basis. Only when theinspections based on the selectivity model yieldbetter results than the inspections based on ran-dom sampling does the model make a valuablecontribution to risk management. This applies tophysical inspections as well as to other controlinstruments.

Conclusion

The rate of physical inspection may be a useful per-formance indicator if used in conjunction withother performance indicators. In all cases, this ratemust be analyzed along with revenue performanceduring the period when the physical inspectionrates change.

28 Customs Modernization Handbook

Much would be gained if, by focusing on thisperformance indicator, project managers and poli-cymakers were to address the complex issue of riskmanagement more forcefully.

Annex 1.E Checklist of Guidelinesto Define a Customs ModernizationStrategy

The following guidelines can be useful in develop-ing and managing a customs modernizationstrategy.

Identify the Main Components of the Moderniza-tion Based on the Findings of the Diagnosis

• Determine the focus of the reform, key meas-ures, phasing, and sequence.

• Identify departments within customs or outsideagencies affected by the process.

• Decide whether the problem involves reorgani-zation or staffing issues and identify the keystrategic steps to deal with these organizationaland human resources issues.

Describe the Enabling Environment

• Develop a matrix showing, by core function,who is in charge of which activity. In particular,the matrix should take into account what activi-ties are to be undertaken by customs. Theseshould include activities dealing with organiza-tion, personnel, clearance, brokers, transit, IT,control, prosecution, transport, insurance, andfinancial practice. The matrix should alsoinclude, in addition to those activities under-taken by customs, those that are undertaken byother government departments and agenciessuch as finance, commerce, transport, interior,industry, health, justice, Chamber of Commerce,and foreign affairs, as well as activities under-taken by the private sector and those resultingfrom international agreements.

• Develop a process flow chart showing the inter-actions between agencies and points of friction.

Test the Commitment of the Governmentor the Administration

• Organize a brainstorming session within cus-toms to determine where the administration

wants to go, and phase a strategic action planthat is not a shopping list.

• Validate the strategy either at the level of theMinister of Finance or at other governmentlevels.

• Identify signals of political commitment, includ-ing a sustainable financing plan (both nationalbudget and donor funding) that will be crucialfor the sustainability of the reform.

• Ensure that all other stakeholders (for example,other ministries or agencies and private sectorrepresentatives) are on board.

Check What the Other Donors Are Doing

• Develop a matrix of donor intervention andplans.

• Carry out a summary gap analysis in terms ofoutside support for the reform.

• Identify areas that need to be the focus of theforthcoming initiatives and request for externalsupport.

• Establish a donor coordination mechanism.

Appoint a Change Management Unit

• Designate staffs or an organizational unit thatwill monitor the entire modernization process.

• Identify a champion that is committed to thereform and is well connected with the variousstakeholders.

• Ensure that staffs responsible for implementingthe reform are released from their other dutiesand have adequate accommodation.

• Establish a project steering committee, includ-ing other donors and private sector representa-tives.

Further Reading

The word processed describes informally reproduced works thatmay not commonly be available through libraries.

Inter-American Development Bank. 2001. Customs Best Practicesin East Asia and Latin America. Washington, D.C.

Keen, Michael, ed. 2003. Changing Customs: Challenges andStrategies for the Reform of Customs Administration.Washington, D.C.: International Monetary Fund.

Lane, Michael. 1998. Customs Modernization and the InternationalTrade Superhighway. Westport, Conn.: Quorum Books:.

World Customs Organization. 2003. Risk Management Guide.Brussels. www.wcoomd.org/ie/En/search/search.html.

———. 2003. “Capacity Building in Customs.” Brussels.Processed. www.wcoomd.org/ie/en/Past_Events/Past_events.html.

Strategy for Customs Modernization 29

References

The word processed describes informally reproduced works thatmay not commonly be available through libraries.

APEC Economic Committee. 2002. “Measuring the Impact ofAPEC Trade Facilitation on APEC Economies: A CGEAnalysis.” Singapore.

Barbone, Luca, Luc De Wulf, Arindam Das-Gupta, AnnaHanson. 2001. “World Bank Projects in the 1990s with Taxor Customs Administration Reform Components: AReview.” Tax Policy and Administration Thematic Group.Washington, D.C.: World Bank. econ.worldbank.org/docs/964.pdf.

Bernardo, Antonio. 2003. “Trade Enhancement Initiatives in thePhilippine Customs Service.” Presentation at the World Cus-toms Organization 101st/102nd Session of the CustomsCooperation Council. June 26–28. Brussels.

Ebril, Liam, Janet Stotsky, and Reint Gropp. 1999. “RevenueImplications of Trade Liberalization.” IMF Occasional Paper180. International Monetary Fund: Washington, D.C.

Gill, J. B. S. 2000.“A Diagnostic Framework For Revenue Admin-istration.” World Bank Technical Paper No. 473. Washington,D.C.: World Bank.

Hinkle, Lawrence, Alberto Herrou-Aragon, and Keiko Kubota.2003. “How Far Did Africa’s First Generation Trade ReformsGo?” Africa Region Working Paper Series, No. 58a.Washington, D.C.: The World Bank.

Holl, John. 2002. Customs-related Technical Assistance for TradeCapacity Building. Nathan Associates report prepared for theUSAID. Arlington, Va.

International Chamber of Commerce. 2002. “Customs Guide-lines.” www.iccwbo.org.

Keen, Michael, ed. 2003. Changing Customs: Challenges andStrategies for the Reform of Customs Administration. Wash-ington, D.C.: International Monetary Fund.

Lane, Michael. 1998. Customs Modernization and the Interna-tional Trade Superhighway. Westport, Conn.: QuorumBooks.

Mendoza, Jaime, and Jose Eduardo Gutierrez. 2003.“A Methodol-ogy to Measure the Time Required for the Release of Goods.”Working Paper 01/03. Aduana Nacional de Bolivia. Bogota.

Moroccan Government. Administration des Douanes et ImpôtsIndirects. Délai de dédouanement, available at www.douane.gov.ma (click on Universitaire, then Chiffres clés).

Nathan Associates. 1996. “Findings, Conclusions and Recom-mendations.” Research of the Quality Control System in Egypt,

Volume I. Prepared for the Government of Egypt. Arlington,Va.: Nathan Associates Inc. http://www.economy.gov.eg/Download/02)%20Quality%20Control%20System/Quality%20Control%20System-English.pdf.

———. 1998. “Pilot Study for Pre-certification of ImportedProducts.” Study Prepared for The General Organization forExport and Import Control. Ministry of Trade and Supply,Government of Egypt. Arlington, Va.: Nathan Associates Inc.www.economy.gov.eg/Download/07)%20Pre-Certification%20of%20Imports/Pre-Certification%20of%20Imports-English.PDF.

OECD. 2003. Trade Facilitation Reforms in the Service of Develop-ment. Trade Directorate, Trade Committee. Document num-ber TD/TC/WP (2003) 11/Final. Organisation for EconomicCo-operation and Development: Paris.

Raven, John. 2001. “Trade and Trade Facilitation, A Toolkit forAudit, Analysis and Remedial Action.” World Bank Discus-sion Paper No. 427. Global Facilitation Partnershipfor Transportation and Trade. Washington, D.C.: WorldBank.

Steenlandt, Marcel, and Luc De Wulf. 2004. “Morocco.” In LucDe Wulf and Jose Sokol, eds. Customs Modernization Initia-tives: Case Studies. Washington D.C.: World Bank.

UNECE (UN Economic Commission for Europe). 1982. “Inter-national Convention on the Harmonization of FrontierControl of Goods.” Inland Transport Committee. Geneva.www.unece.org/trans/conventn/harmone.pdf.

UPECON Foundation. 2003.“The Study on Measurement of theTime Required for the Release of Goods in the Republic ofthe Philippines.” Manila. Processed.

World Bank. 1996. “Global Economic Prospects and the Devel-oping Countries: 1996.” Washington, D.C.

———. 2002. World Business Environment Survey. Washington,D.C. www.worldbank.org/privatesector/ic/ic_ica_resources.htm.

———. 2003. Global Economic Prospects 2004: Realizing theDevelopment Promise of the Doha Agenda. Washington, D.C.

———. 2004. “TTFSE Progress Report 2003.” Washington, D.C.www.seerecon.org/ttfse

WCO (World Customs Organization). 2002. “Guide toMeasure the Time Required for the Release ofGoods. Brussels.” www.wcoomd.org/ie/En/Topics_Issues/FacilitationCustomsProcedures/facil_time_release_study.htm.

———. 2003. Risk Management Guide. Brussels.Zarnowiecki, Michel. The World Bank.

30 Customs Modernization Handbook

31

2HUMAN RESOURCES

AND ORGANIZATIONALISSUES IN CUSTOMS

Luc De Wulf

TABLE OF CONTENTS

Human Resources: An Organization Is Onlyas Good as Its Staff 32

Customs Organization and OrganizationalPlacement 36

Autonomous Revenue Authorities 40

Management Contracts 44

Operational Conclusions 46

Annex 2.A Human Resources Checklist 47

Annex 2.B Management Contracts Checklist 48

Annex 2.C Checklist for Autonomous RevenueAgencies 48

Further Reading 49

References 49

LIST OF BOXES

2.1 Staff Renovation in BolivianCustoms 34

2.2 Denmark: Integration of Customs and TaxAdministration 39

2.3 Revenue Targets and Autonomy: Illustrationsfrom Tanzania and Uganda 42

The contributions of Michael Lane and the assistance of MelanieFaltas are gratefully acknowledged.

1. At a different plane, the “international” position of customs isdue to two factors. It deals with international trade and, in doingso, follows internationally agreed on methods, practices, andinstruments. It is the commonality of their vocational practices,a shared understanding of concepts, and an obligated harmo-nization of processes and procedures that makes customs inter-national. A substantial part of customs legislation is developedin multilateral organizations like the World Customs Organiza-tion (WCO) in the form of conventions. In many cases, domes-tic legislation conforms to these international conventions.

Customs is a unique organization among govern-ment agencies in that it is neither a domestic agencynor an international agency. It is poised on the inter-national borders,1 not only as an expression of anation’s sovereignty, but also as the nation’s guardagainst external threats to health, safety,and the envi-

ronment; protecting (for better or for worse) domes-tic industry and collecting revenue to support thegovernment. It must be aware of the border implica-tions of national priorities concerning domesticcrime, immigration, labor, the economy,and agricul-ture.At the same time, it must maintain an awarenessof international issues and their potential impact onthe nation, and it must be knowledgeable aboutnational obligations to trade and transport treatiesand conventions. In many ways, customs organiza-tions relate more closely with their counterparts inother countries than they do with other agencies intheir own government. They frequently look to cus-toms administrations internationally and in neigh-boring countries for assistance and for ideas on howto improve operations or enforcement, as well as toexchange information on emerging threats.

The first section of this chapter deals with themodern management of human resources (HR) incustoms. The second section addresses issues relatedto the more traditional customs organization, whilethe third and fourth sections discuss two recentorganizational issues that have received consider-able attention in recent years: Autonomous RevenueAuthorities (ARAs) and management contracts.The final section provides operational conclusionsand recommendations. The annexes provide check-lists for issues of human resources management,management contracts, and ARAs.

Human Resources: An OrganizationIs Only as Good as Its Staff

Good management of human resources is probablythe single most important issue that affects the effi-ciency and effectiveness of customs, irrespective ofits organizational structure. This cannot be overem-phasized as all aspects of customs management andcustoms clearance, including the application andmaintenance of modern information technology(IT), will require that staff is qualified to operate theexisting systems efficiently and to prepare the exist-ing services for the introduction of new processesand techniques. In doing so, staff must be attuned todevelopments in international trade logistics andmust adjust to shifts in emphasis with respect tocustoms’ mandate.

Historically, customs work consisted of themanual labor of inspecting cargo, vessels, and pas-sengers, and patrolling long stretches of borderbetween ports of entry. Customs management wasclose to higher ranking government officials, whileits staff was often poorly educated, trained, andcompensated. This arrangement undermined pro-fessionalism and integrity in customs.

Increasingly, government services are being heldto higher standards. The imperatives of a globalizedeconomy on customs have become clear. A moderncustoms administration, responsible for protectingand representing the government at its country’sborders and ports, must use a professional work-force and an enabling technology to accomplish itsmission. Managing human resources at customscan be broken down into several phases:

• defining the desired staff profile• establishing a recruitment process that ensures

that customs has the desired staff on board

• training incumbent staff to maintain skill levels• ensuring that the compensation package enables

customs to motivate and retain staff• ensuring that poor performance and integrity

failures are promptly sanctioned.

Staff Profile

A modern customs administration needs to definethe profile of its desired staff. The general educa-tional background of all staff should be sufficientlyhigh to ensure that they can acquire and maintainthe skills required by a customs service. Such skillsare bound to change over time and will increasinglyrequire expertise in accounting, intelligence gather-ing, finance, investigation, analysis, training, plan-ning, and HR management. All these functions willincreasingly adopt procedures that rely heavily onthe use of IT. Modern workflow analysis should beused to determine the desired distribution of per-sonnel across the various skill categories.

Some of the major services required of customs,and the professional qualifications essential to ful-filling these requirements, include the following:

• Enforcement of domestic laws and regulations atborders. These laws and regulations should com-ply with all international customs conventionsand standards to which the country has sub-scribed. Hence, staff should stay informed aboutdevelopments in international trade negotia-tions and the requirements of globalization. Staffneed adequate legal expertise to internalize thedevelopments in the trading and internationalcustoms community and to translate them intodomestic legislation.

• Implementation of modern customs clearanceprocesses. With heavy IT input, modern riskassessment is based on modern intelligencegathering techniques to facilitate trade and to beattuned to private sector trade logisticsadvances. Expertise is required in IT as is theability to perform risk analysis and post-clearance audits.

• Maintenance of open communications with thetrading community. Customs must ensure thatthe trading community has full informationregarding its obligations and that the tradingcommunity’s views are taken into account indecisionmaking at customs. Communication

32 Customs Modernization Handbook

skills are required, but operational interface withthe trading community must be conducted atarm’s length.

• Enforcement of laws relating to intellectual prop-erty rights, security, drug trafficking, and, eventu-ally, labor and human rights. While labor andhuman rights may not be the national priority,the need to enforce such legislation may emergedepending on the outcomes of future tradenegotiations. This requires the capacity to inte-grate the agendas of other agencies into customsprocedures.

• Collection and dissemination of internationaltrade statistics requires IT expertise and anawareness of the importance of statistics for eco-nomic decisionmaking.

• Management of customs’ HR requires soundhuman resources management and humanresources development expertise.

Recruitment

Adjusting the existing staff profile to the desired oneis frequently a gradual process. As the older staffretires, new staff has to be recruited not only forreplacement but also to provide for any expansion inservice. The recruitment effort should be a system-atic one and could involve the announcement of jobvacancies. Such announcements should clearly statethe desired qualifications of the new staff, such asacademic background, previous work experience,and so forth, and should clearly describe the recruit-ment process. Transparency in the recruitmentprocess is important as this will set the standard for anew career at customs and curb the tendencies forfavoritism and clientelism that often plague recruit-ment in the public sector.2 Public advertising ofvacancies as well as participation in job fairs and vis-its to schools of higher learning are recommendedto ensure that qualified people apply for the adver-

tised jobs. Potential recruits should be subjected tostringent background investigations performed bytrained investigators who might interview neigh-bors, associates, and previous employers. Checks ofpolice records should be performed, as well as creditand bank account checks to assess the extent andsources of income. Entry requirements wouldinclude testing for the specific skills and aptitudes.Human resources management staff in customscould undertake these tasks in-house or could turnto recruitment professionals. New recruits shouldbe advised that a career in customs involves rotationto enhance multifunctionality and to avoid thedevelopment of potentially unsavory relationshipswith the local trading community.3 New recruitswith no prior experience in customs-related workshould undergo intense training and testing to pre-pare them for their new assignments. If successful,they should undergo a probationary period beforebeing confirmed as customs staff. Such probation-ary periods often last a full year, during which theemployee can be terminated for unsatisfactory per-formance or disciplinary problems without thecomplex recourse to appeals and administrative tri-bunals. Following this probationary period and sat-isfactory performance evaluation, the traineesshould be confirmed. Relying on transparent per-formance criteria aids supervisors and enhances thetransparency of the recruitment process.

Most customs organizations traditionally rely onthe recruitment of young candidates who are thenschooled in the best practices of the customs servicethrough a combination of academic and on-the-job training. However, modern customs practicesrequire staff to possess expertise that cannot easily beattained through training within the customsservice. Expertise in IT and in accounting, which areincreasingly required to perform post-clearanceaudits, are only two examples. Recruitment proce-dures and compensation scales need to be sufficientto attract staff with these specialized skills. Whenqualified applicants are not available, it is possible attimes to sidestep these civil service restrictions byoffering attractive consultant contracts.This practicehas its downside though, as it could easily demoralizecustoms staff in general and could present the prob-lem of staff continuity in specialized assignments.

Human Resources and Organizational Issues in Customs 33

2. As was the case in the 1880s in the U.S. Customs, it is knownthat potential candidates for positions in customs in some coun-tries have paid for the appointment at prices that at times were amultiple of the annual salary. In Bolivia, for instance, before therecent reform, some customs officials worked “pro bono” andcompensated themselves in the process of executing their tasks.High-level officials also are known to have interfered frequentlyin the appointment of family members or members of their eth-nic groups—practices that undermine the recruitment processand create allegiances that are alien to the performance of theduties of customs officials.

3. In both Zambia and Morocco, for instance, staff rotation hasbecome part and parcel of a career in customs.

The process of retirement and the recruitmentof new staff will be a slow one if desired profiles ofnew staff differ substantially from the profile ofthose still on board. At times management maywant a faster staff reprofiling. This was the casewhen ARAs were introduced and drastic changes instaffing were undertaken. (Details are providedin the Autonomous Revenue Authorities section.)

Box 2.1 provides some details of the process fol-lowed in Bolivia.

Training

In-service training should be a major responsibilityof the HR team at customs. The demands of global-ization and the rapid adoption of IT in the various

34 Customs Modernization Handbook

BOX 2.1 Staff Renovation in Bolivian Customs

Prior to reform, staffing at Bolivia’s customsadministration was characterized by a largenumber of pro bono personnel working withouta specific position or salary, appointments basedon political recommendations rather than onindividual merit, high turnover of personnel, lowsalaries, and an absence of training. As part ofthe government’s overall reform of its wholeadministration, customs was selected as a piloton the basis of the recently adopted Civil ServiceStatute and Civil Service Program. Humanresources management reform was an essentialelement in helping customs become an efficientand transparent organization, while significantlyreducing corruption.

The selection and hiring of personnel was tobe based on transparent and competitiveprocesses. All positions became open to publiccompetition; all positions filled by staff whowere not competitively selected were given pro-visional status; all pro bono staff positions wereeliminated. Specialized firms were hired throughpublic bidding to undertake the selectionprocess. Customs benefited from the prestige ofthe independent firms, and misgivings concern-ing the transparency of the process wereavoided. At the same time the HR Departmentdeveloped a new market-based wage systemthat offered competitive salaries.

Openings for top and medium level positionswere published on October 30, 1999, and forprofessional and technical positions on April 16,2000. The outcome of the first opening wasnegatively affected by lack of appropriate pub-licity and effort (which held the number of appli-cations below expectations), the wrongful elimi-nation of a number of applications for borderpositions, and the unreliable software systemused. Because many positions remained unfilled,a third opening for top level and technical per-sonnel was issued on January 14, 2001.

The selection process required a series ofprior actions: defining the ideal profile of cus-

toms officers; quantifying staff requirements, setat slightly over 700 officers, of which 575 posi-tions were open for application; and definingjob profiles with minimum requirements of edu-cation, experience other than previous customsexperience, and personal qualities. There werevarious evaluations of the candidates: curricularevaluation; technical and psycho-technical eval-uation based on tests; and integral evaluationthrough interview. A minimum score was estab-lished for each position. Candidates were alsoscreened to eliminate those who, as former orcurrent officers, had been found guilty of violat-ing internal customs regulations or of commit-ting a felony. Once tests were graded, a short listof applicants to be interviewed was established.Following completion of the process, a reportthat included a short list of candidates with sum-maries of the results obtained in each of theexaminations for each finalist was provided tocustoms to assist in making final evaluations. Afinal evaluation was conducted through a struc-tured interview with the purpose of validatingthe information provided by the consulting firm,verifying that all requirements had been met,and determining the candidate’s suitability for aspecific position. The final evaluation was carriedout by a committee selected by the Board ofDirectors, which submitted a report thatincluded recommendations to the Board ofDirectors or General Management. Appointedstaff members were required to undergo anevaluation period of three months before start-ing an administrative career.

All in all the process attracted 12,563 appli-cants, with 8,763 candidates fulfilling all require-ments; 2,718 candidates passed the technicaland psycho-technical tests; and, following inter-views, 1,653 were short listed, 87 percent ofwhom were selected to join the customs admin-istration.

Source: IDB 2001.

aspects of customs operations make ongoing train-ing an absolute necessity. Experienced customsofficers should be teamed up with professionaltrainers to offer such training.

In modern Customs, many promotions dependon successful completion of well-defined trainingprograms and all staff must undergo annual train-ing, agreed on with the HR department and withdirect supervisors. Supervisors are evaluated withrespect to the implementation of the agreed ontraining of their staff. Special training academiescan be appointed for this purpose on a national orregional basis. Full advantage should be taken ofthe training provided by bilateral agencies, theWCO, and even preshipment inspection (PSI)companies, whose contracts often specify trainingobligations.4

Staff Compensation

Staff compensation is a crucial factor in HR man-agement. It should be sufficiently high to attract andretain staff with the necessary qualifications to startwork at customs. However, overall staff salaries areoften inadequate and the difference between thecompensation of management and lower level staffis much narrower than what prevails in the privatesector.5 While compensation is not the only moti-vating factor for doing a good job, it certainly rankshigh.6 Developing esprit de corps and pride in theoffice are complementary motivators that are oftennot sufficiently emphasized. In recent years, forexample, Moroccan customs has paid special atten-tion to this factor and this initiative appears to havehad some benefits.7

In most cases customs does not have much flex-ibility in setting salary levels and must adhere to the

civil service pay scale. Frequently, fiscal stringencyhas caused this pay scale to lag substantially behindthe prevailing pay scale for equally qualified staff inthe private sector. This situation discourages staffand often leads them to seek out facilitation money.It is not unusual for the most valuable staff mem-bers to leave the service, often to use their acquiredknowledge to work as brokers. Inside knowledge ofthe customs service and familiarity with customsstaff can both facilitate trade formalities for theircustomers, and potentially undermine integrity.The integrity risk has led some countries to preventcustoms staff from providing customs brokerageservices for several years after ending employmentwith customs.

A partial solution to the salary scale rigidities isto provide bonuses to staff. While many customsservices pay bonuses, only a few pay them in a waythat enhances effectiveness and efficiency. To do so,bonuses must be large enough to begin to bridgethe gap between what private sector workers earn(discounted for the job security in the public sec-tor), and satisfy a number of stringent criteria.Bonuses must have internal and external legiti-macy, and be objective, transparent, and easy toadminister. In addition, they should be SMART,that is, specific, measurable, achievable, relevant,and timed (De Wulf 2004). However, ensuring thatperformance evaluations provide for adequatedifferentiation of staff performance is not easy. InMorocco, for instance, where a fully satisfactorynote leads to payment of a bonus that equals100 percent of base salary, the great majority ofstaff members receive an evaluation report thatqualifies them for the maximum bonus amount.

Internal legitimacy requires that customs staffperceive the bonus system to be distributed justly,without favoritism, with transparency, and withpossibilities for appeal. External legitimacy refers tothe acceptability of the bonuses outside customs, arequirement for allocating the necessary budgetresources that pay for these bonuses. In the absenceof either internal or external legitimacy, the bonussystem will not be sustainable. In Ghana, forinstance, the higher salaries that customs staffreceived when the ARA was created could not besustained because of opposition from other civilservants. It would appear that the strict conditionsthat need to be fulfilled for bonuses to compensatefor low salaries pose substantial challenges for

Human Resources and Organizational Issues in Customs 35

4. In Ghana, the service agreements of the companies undertakingDestination Inspection Services include the delivery of a trainingprogram for the customs staff. That this program was signed withthe Ministry of Trade and Industry and not with customs compli-cates the integration of the training with other similar customsinitiatives. Even worse, it may undermine any initiative of customsto take full responsibility for its training program.

5. In Nepal, for instance, salaries of customs staff are only one-third those paid in the private sector; the base salary of theDirector General is only 150 percent higher than the startingsalary of a gazetted officer.

6. Interesting background on this issue can be found in VanRijckeghem and Weber (1997).

7. For details see Steenlandt and De Wulf (2004).

design and implementation, making such systemsrisky and in need of close monitoring.

An alternative to providing substantial bonuseswould be to put revenue staff on a higher pay scalethan the rest of the civil service, in light of the cru-cial importance that resource mobilization plays inrunning the government. Better pay would alsoprotect customs staff somewhat against the tempta-tions of accepting bribes from traders.8 A higherpay scale would need to be combined with overallcustoms reforms that provide guarantees ofenhanced effectiveness and efficiency.

Some customs services have adopted a more dras-tic solution to the inadequacy of staff compensationby creating ARAs that initially paid salaries that werecompetitive with those paid in the private sector, orwith those given to the best paid civil servants.

Performance-related salary increases and promo-tions are also important factors for motivating staff.Yet both are often constrained by rigid promotionpolicies that are commonly applied to all civil ser-vants and that are highly dependent on seniority.Noteworthy exceptions do exist. In Mozambique, forinstance, staff performance is assessed on a quarterlybasis during the two-year practical training period,and is closely monitored afterward by an internalaudit. In Angola, an annual appraisal system isintended to match staff skills to job descriptions andto properly identify candidates for senior positions.

The state of infrastructure, both for work andfor housing, particularly at outlying customs posts,also affects work ethic and morale. Often suchinfrastructure has suffered from years of neglectdue to budget constraints. The poor outpost hous-ing infrastructure in many border posts leads staffto go to great lengths to avoid such postings, whichoften are considered to be unfair hardship or evenpenalty assignments. In Zambia and Tanzania, cus-toms reforms included upgrading infrastructure, afeature that was greatly appreciated by staff.

Integrity and Sanctions

Modern customs clearance practices—based onintensive use of IT as well as adequate staff

compensation—will play the determining role incountering integrity problems. However, experi-ence has shown that this is not sufficient to com-pletely eradicate corrupt practices. Hence, any HRpolicy must clearly spell out how to deal with theseissues. Chapter 4 deals explicitly with the issue ofintegrity in customs, so some brief remarks mustsuffice here. Staff should be made fully aware thatcorrupt practices and slacking behavior will notbe tolerated. Disciplinary actions could be madeexplicit in the personnel manual. Such actionscould range from admonishment, to skippingsalary adjustments and bonus payments, to dis-missal. Dismissal from the service should not beused lightly and safeguards should be put in placeto ensure that disciplinary actions are meted out inan unbiased manner. Official reaction to accusa-tions of corruption should be prompt, both to clearunjustified accusations and to avoid lengthy delaysbetween offense and penalty. Sanctions that includedismissal from the service can be a powerfulenforcer of discipline when staff compensation isgood and unemployment is high.9

Customs Organization andOrganizational Placement

A highly motivated and competent staff can makealmost any organization work and can overcome aplethora of organizational obstacles; but a goodorganizational structure will help greatly. Even aperfect model of organizational design and effi-ciency, should it exist, would not survive if theemployees are not competent, qualified, trained,and motivated. An ideal organization is not static.Public and private sector organizations modifytheir structures continually to address new chal-lenges, changes in workload, geographic expansion,competition, the introduction of new technology,and innovation. A customs administration is noexception and often struggles to find an idealorganization to match the constantly changing cus-toms environment. However, reorganization is nota panacea. Frequently, it is used as an excuse to dis-guise an inability to identify the root cause of poorperformance. Reorganization can be disruptive and

36 Customs Modernization Handbook

8. Higher salaries for staff often impart greater social responsi-bility toward the larger family or clan, thereby not reducing, butincreasing, the “need” to take bribes to live up to these greaterresponsibilities and new status in the traditional hierarchy(Fjeldstad, Kolstad, and Lange 2003).

9. As it is, the punitive mechanism that customs managementmay employ in some countries is hamstrung by corruption inthe legal system.

could divert attention away from the ongoing workof the agency.

This section presents the traditional way thatcustoms has been organized together with someminor variations on that theme.

Internal Organization

Traditionally, customs organizations are structuredas a department of the Ministry of Finance (MOF)and are fully accountable to the MOF for theiroperations and results. The overarching responsi-bility of customs is to raise fiscal revenue as pre-scribed by the budget. In doing so, it should ensurethat customs procedures and policies are uniformlyand consistently applied across the various pointsof entry and modes of transport. At times, customshas somewhat greater autonomy than other agen-cies or other ministerial departments, generally dueto its responsibilities as border guard, as well as itsresponsibility to deal with noncompliant tradersand smugglers. Given the nature of its responsibili-ties, the organizational structure of customs isdecentralized, consisting of headquarters (HQ) andregional and local offices. HQ’s responsibility is todevelop operational policy and procedures—including the use of IT—that aim for effectivenessand efficiency and compliance with internationalagreements related to the World Trade Organiza-tion. HQ monitors the activities of the decentral-ized offices and is responsible for personnel policy,including recruitment, compensation, training, andenforcement. Regional offices oversee the activitiesof the local offices in their jurisdiction, while localoffices are generally the point of contact with theinternational trading community and other cus-toms administrations. Essentially, the staff at thelocal offices decide on the level of verification thatis required when processing a declaration andreleasing goods, as well as the effectiveness and effi-ciency of this process (Castro and Walsh 2003).

In addition to the traditional departments (legal,procedures, valuation, IT, law enforcement, fieldoperations, international cooperation, corporateservices, personnel, audit) many modern customsadministrations are adding a department responsi-ble for maintaining relations with the private sec-tor—to solicit concerns, explain the procedures, andprovide for an ombudsman when controversiesarise with international traders. Importers,

exporters, carriers, and customs brokers or for-warders also require an independent appealsprocess to provide an avenue for appealing decisionsthat they believe are in error or are inconsistent withinternational customs practices. This institutional-ized openness to the private sector can help buildthe necessary trust between the private sector andcustoms, trust that will benefit all concerned.

Some customs administrations recognize that arelatively small number of taxpayers are responsiblefor a large share of the total import duties and haveadjusted their internal operations to provide specialservices for large taxpayers. This is in line with theprovisions of the Kyoto Convention that permits“authorized” importers to obtain faster release oftheir cargo; that is, traders that conform to certaincriteria of transparency and honesty benefit fromeasier customs procedures, with the proviso thatpost-release audits can be undertaken. The Egypt-ian Model Customs and Tax Center, for instance, isequipped to process all customs and tax declara-tions of a select group of large enterprises (about200 at the end of 2003) that account for a largeshare of total trade and tax payments. In fact, thiscenter operates a single window for them wherenew and efficient procedures have been introduced.

Customs’ Position in the OverallGovernment Structure

The MOF has traditionally been the governmentorganization in which customs resides and thatprovides oversight and direction in view of its pri-mary mission of revenue collection. It has beenargued that this does not have to be so, especially inlight of customs’ changing responsibilities. Overtime, customs’ role in trade facilitation supersedesthat of revenue mobilization in many countries;and there is an increasing rationale for the Ministryof Commerce to assume a greater supervisory rolefor customs. With enhanced concerns for security,the United States has placed customs inside theDepartment of Homeland Security, while Canadahas placed customs within the Public Safety andEmergency Preparedness Ministry. In Australia, theDepartment of Trade and Customs was the firstCommonwealth Government department estab-lished after the Federation of the Australian Statesin 1901. Australian customs has since been linkedwith a number of ministerial portfolios—trade,

Human Resources and Organizational Issues in Customs 37

excise, business, consumer affairs, science, industry,commerce, and justice—based on the changing pri-orities of government. It now lies in the Justice andCustoms portfolio, reflecting the government’sdesire to ensure effective cooperation between allfederal law enforcement and security agencies.10

The placement of customs under one ministry orthe other is, at the end, a decision that could bereached rationally given the unique administrativestructure and economic circumstances of the coun-try, as well as the mission assigned to customs bythe government. One might keep in mind, however,that the reorganization of departments or the relo-cation of the agency to another department orministry often is a favorite activity of governmentreformers, but one that certainly has, in the absenceof real reform initiatives, little or no effect otherthan guaranteed internal and external disruption.Whatever the organizational context of customs, itis crucial that customs

• operates with adequate funding and staffing • operates under correct oversight to ensure that

rules and regulations are respected• has a personnel system that enables it to recruit,

train, and develop a professional workforce andthe authority to remove corrupt or incompetentemployees and to keep them removed

• operates with adequate autonomy in personneland operational matters

• provides an appeals process for the tradecommunity

• is held accountable for meeting performancegoals.

Advantages of Merging Customs with OtherRevenue Agencies

In the 1990s, several countries merged customs withother revenue departments, in the hope of enhancingthe efficiency as well as the effectiveness of revenuecollection. The intuitive reason for such a merger isthat there must be economies of scale to be exploitedby combining the personnel, legal, and administra-tive functions of each of these departments,which, in

the final analysis, deal with many of the same taxpayers (PLS RAMBOLL 2001).11

The PLS RAMBOLL (2001) study reviewed theexperience of Denmark, Canada, Colombia, theNetherlands, and Latvia in integrating their tax andcustoms agencies.12 It notes two different motivesfor the integration initiatives: to increase the effec-tiveness (the Netherlands, Latvia, and Colombia) orthe efficiency (Denmark, see box 2.2) of revenuecollection, or both (Canada). Effectiveness refers tothe way the revenue is collected—amounts of rev-enue raised and the level of fraud, fairness, compli-ance, and so forth—while efficiency refers to theprivate and public resources spent on each unit ofrevenue raised.13

The reforms in the Netherlands aimed at greatereffectiveness. High tax rates in the 1970s resulted in agreater incidence of tax avoidance and fraud, whileprosperity led to a growth in the number of taxpay-ers. The tax legislation had also become morecomplex, indicating a need for better taxpayer serv-ices, which the government believed could be betterprovided with the integration of the revenue andcustoms departments. The merger of the customsand tax institutions in Denmark aimed at increasedefficiency. It was the flagship of the government’santibureaucracy reform and enjoyed considerablepolitical support. Before the merger, Denmark had arelatively high number of staff in the tax and cus-toms administrations. Reducing the number to alevel comparable to those of similar countries, suchas Sweden and Norway, was fundamental to lower-ing collection costs.

The merger of the Canadian tax and customsadministrations was undertaken to rationalize the

38 Customs Modernization Handbook

10. In addition to customs, the Justice and Customs portfolioincludes the Australian Crime Commission, the Australian Fed-eral Police, and AUSTRAC (Australia’s anti-money-launderingregulator and specialist intelligence unit).

11. The discussion in this section draws on the findings of thisstudy.

12. The merger of customs with revenue is also under consider-ation in the United Kingdom. As noted by the press on the Trea-sury Report on the subject, the main benefit of the merger isexpected to come from reduced compliance costs for businessesas companies could deal with a single tax authority.

13. This study did not cover the merger of domestic tax officesand 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 thebusiness processes of these agencies have converged. Thetendency to unify the tax collection agencies has been strongerin cases where the share of the value added tax (VAT) on importswith respect to total revenues is high and in cases in whichcontrol of other taxes depends on VAT declarations.

collective revenue administration, partly to make itmore efficient and partly to improve customerservice. The merger was also a response to demandsat that time for a more federal government struc-ture. The reorganization affected virtually allaspects of the political and administrative setup ofthe new organization, to secure maximum advan-tages and benefits. At the political level, the posts ofDeputy Minister for Taxation and Deputy Ministerof Customs were merged into one position. Newlegislation was introduced to integrate the two setsof statutes and to merge existing legislation. Theformer 23 overlapping regions were reduced to 6consolidated regions performing all functions ofthe tax and customs administration at the regionallevel. The HQs of the two former departments wereconsolidated into one, which was organized into aseries of business lines supported by corporateservices. A major staff development program wasinitiated, while IT and other support systems wereconsolidated into joint systems. Until recently, onlythe Customs Border Services remained a separateentity—all other aspects of the work of the formerdepartments and regional offices have been organi-zationally and operationally integrated. This orga-nizational structure was revised again in 2004,when customs was integrated into the Public Safetyand Emergency Preparedness Ministry.

The case studies suggest that the success of anymerger will depend greatly on the preparations pre-ceding the merger, the political support it receives,

and the involvement of stakeholders—taxpayersas well as staff of the different agencies. In theNetherlands, the success of the merger was attrib-uted to a large extent to sound preparatory workthat started in the 1970s. The actual implementationtook five years, from 1987 to 1992. In Colombia,however, preparation and political support for themerger were weak, and the results less than positive.In Canada, staffs were intimately consulted andmany contributed to drafting new legislation andthe rollout of the merger. The presence of a strong,politically well-connected champion heading themerger also helped greatly.

Clear from these initiatives is that a merger mustfully account for the fact that substantive proceduraldifferences between the customs and tax depart-ments create asymmetries that will need to beaccommodated in the unified institution. Tax col-lection operates on the basis of self-assessment andafter-the-fact control, which allows tax-related datato be batched. Customs procedures require paymentand control to take place simultaneously, throughself-assessment combined with post-release audits.Also, customs operations are strictly guided by theneed to release cargo promptly, adding a uniquedimension to the overall customs operation, onethat is not shared by other tax departments.

It is arguable that the effectiveness of the revenueservices does not necessarily require a large degree ofintegration between the operations of the tax andcustoms authorities. The case studies illustrate that a

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 customsand tax administrations in Denmark was to con-siderably increase efficiency. The strategy cen-tered on full integration of the tax and customsadministrations at all levels to reduce administra-tive costs. This strategy was also in line with theintegration into the European Union (EU), whichresulted in the reduction of tariff revenues as asource of fiscal revenues. The strategy includeda number of rationalization measures:• a reduction in number of combined staff in

the two agencies—from 6,742 employees in1989 to 5,846 in 1992 and 5,643 in 2000

• the design of an ambitious, integrated IT sys-tem, integrating all revenue collection systemsinto one

• a massive reduction in the number of localoffices, merged into a few regional offices

• the establishment of a flat organizationalstructure, which reduced the number of man-agement levels and delegated responsibility tolower levels

• the implementation of a number of new pub-lic management tools, such as contract man-agement between central and regional offices,contracts between the ministry and the officemanagers, focus on core activities and reduc-tion of support activities, and a massive focuson value-based management.

Source: PLS RAMBOLL 2001

full merger of the two institutions may, in fact,impede the goal of increasing effectiveness. Ajoint focus on the operational aspects, a cross-institutional focus on target groups, and coordi-nated legislation and planning may serve thepurpose of enhanced effectiveness and efficiency.A merger of the physical organizations (shared per-sonnel, organizational culture, infrastructure, andIT systems), though, requires tremendous effort onbehalf of the political and administrative leadership,staff, and the stakeholders (vested interests, clients)of the agency—an effort that may in the end becounterproductive. This was the case in Colombia.At times it also threatened to imperil the merger inDenmark. Recently, Latvia decided to roll back itsmerger efforts. For this reason, it is vital that govern-ments are clear on the motive behind the integrationprocess, and that strategies chosen for implementa-tion are in harmony with the motive.

Autonomous Revenue Authorities

The emergence of ARAs14 can be traced to the Exec-utive Agency model that was introduced in the late1980s in the United Kingdom.15 Such agencies wereto operate more like private businesses than likegovernment agencies. Government would makepolicies and assign responsibility for the executionof these policies to agencies that would have greaterautonomy and accountability in their day-to-dayactivities. This approach also gave the illusion thatgovernment had become smaller, a major objectiveof the political parties in power in those days. Theagency approach was then modified and applied tothe departments of the MOF in charge of revenuemobilization. Their proclaimed advantages ofoperating along ARA lines were that

• As a single purpose agency, separate from theMOF, it could focus on a single task.

• With autonomy, it could free itself from politicalinterference in day-to-day activities.

• Freed from civil service constraints, it couldestablish its own personnel policies to enhanceeffectiveness and efficiency.

In sum, the ARA was to be granted greater account-ability, but was also provided with greater opera-tional flexibility, and shielded from political orother interference. It would be misleading to saythat accountability was totally absent before theARAs; however, accountability was either poorlymanaged or customs was able to deflect accounta-bility by stating the restrictions under which it wasforced to operate.

The creation of ARAs provided traders and tax-payers with greater assurance that the new initia-tives to improve effectiveness and efficiency wereserious efforts by the government and that theywould be rather difficult to undo. Traders andtaxpayers were thus expected to react with bettercompliance.

ARAs now operate in a number of countriesin Latin America and Africa16 and were largelyintroduced with Department for InternationalDevelopment (DFID), International MonetaryFund (IMF), and World Bank support. Some havebeen operational now for more than 10 years. Inall these countries, the main reason for introduc-ing ARAs was to mobilize a larger share of fiscalrevenues. Rampant corruption in the revenuedepartments was often identified as the major rea-son that revenue mobilization was totally inade-quate, and why efforts to reform the revenueagencies had yielded no appreciable results.Hence, it may be instructive to review whether theexperience of establishing ARAs has lived up tothe initial expectations, and what lessons can belearned from them. In this review the focus is oncustoms operations, even though these are inti-mately intertwined with the operation of theARAs that combine customs with direct and indi-rect taxation.

Management Structure and Responsibilities

In all cases, ARAs combine the customs depart-ment, the direct taxation department, and the indi-rect revenue departments into one authority. InLatin America, ARAs are headed by a chief executive

40 Customs Modernization Handbook

14. The term Autonomous Revenue Authority is used here, butcan refer to various degrees of autonomy.

15. Much of the argument developed in this section draws fromTalierco (2002), and Fjeldstad, Kolstad, and Lange (2003).

16. Colombia, Ethiopia, Ghana, Kenya, Lesotho, Malawi, Mexico,Peru, Rwanda, South Africa, Tanzania, Uganda, RepúblicaBolivariana de Venezuela, Zambia, and Zimbabwe. The degreeof autonomy varies across countries and functions.

officer (except in Mexico), while in Africa and Asiamost ARAs are headed by a board of directors.Invariably the Minister of Finance appoints thehead of the board, and the board members repre-sent the MOF and other public sector agencies.Some boards (in Zambia, for example) include pri-vate sector representatives. In Uganda the UgandaManufacturers Association received a seat on theboard in 1998. The day-to-day management of theARAs that have a board of directors rests with acommissioner or the chief executive officer. TheARA is entrusted with the administration of taxes(customs, direct, and indirect), but at times is givenresponsibility for tax policy. This mixing of tax pol-icy with administration responsibilities has beenconfusing and has raised conflicts. It was retractedin several ARAs (in Uganda in 1998, for example).The ARAs are given varying amounts of flexibilityto run the agencies, particularly with respect topersonnel matters, as well as financial managementand operational issues, including the introductionof IT.

ARA operations are designed to be shieldedfrom political interference to counter the tendencyof politicians and government officials to appointits political supporters and to use and misuse theinformation held by tax authorities to advancepolitical, personal, and tribal objectives. Such inter-ference has, in the past, strained the relationshipbetween the taxpayers and the tax administrationin a major way (Talierco 2004, 2002).

In several cases governments have chosen toappoint expatriate managers as commissioners ofthe ARAs or as deputy commissioners for customs,VAT, or direct taxes. This has been the case inUganda, Rwanda, and Ethiopia, where a Ghanaiantax administrator, familiar with the GhanaRevenue Authority at times held the post ofcommissioner.

In Zambia, after a few years of tentative reformsfour expatriate experts were appointed in 1997 tohead the Zambia Revenue Authority (ZRA). Cur-rently, an expatriate expert again heads the UgandaRevenue Authority. At the outset the practice ofasking expatriates to run the ARAs was a means ofsecuring technical expertise and management skillsnot otherwise immediately available in the domes-tic market. Also, there was, at times, a perceivedneed to resist pressures for special consideration,which may be hard for managers who are a part of

the community they serve to resist. At the initialstages expatriate managers served as a buffer zonethrough which the authority could establish itsidentity and ethos.17

Financial Autonomy

Greater budget autonomy meant that the ARAsgained some freedom in the use of their budgetswithout detailed scrutiny from the MOF for eachexpenditure, a stifling practice in many countries.Also, some have gained greater autonomy in pro-curement matters. The size of the ARA and cus-toms budget can be set on an annual basis afterdetailed discussion with the MOF, either as afixed percentage of total revenue or as a variablepercentage based on revenues collected—variables that can be defined at the time of thecreation of the ARA.18 The latter variant wasintroduced as an incentive measure. In Peru thisshare was set at 3 percent of customs revenue col-lections, but customs is also allowed to chargefees for services. There is no nominal upper limitto the total revenue. Customs is free to use therevenue as it likes, but must use one-third forinvestment. At times customs receives a premium,to be shared between staff and ARAs, for exceed-ing the revenue target. This provides an incentiveonly if the revenue target is set at a realistic level.In practice this has not always been the case, andrevenue targets were at times set at unrealisticallyhigh levels, when the MOF and foreign donorsoverruled more realistic estimates made by theARA (box 2.3). ARAs may, however, have a ten-dency to underestimate revenue potential to cap-ture bonus payments. When the agreed on budgetshare is retained from revenues raised (as in thecase of Peru) the budget autonomy is safer thanwhen these budget resources must pass throughbudgetary allocations approved by the MOF andparliament.

Human Resources and Organizational Issues in Customs 41

17. Comments made by Darryl Jenkins, who for four years wasCommissioner of the ZRA.

18. The Kenya Revenue Authority receives 1.5 percent of collec-tions, and an additional 3 percent of the difference betweenactual collections and the collection target for a three monthperiod, subject to a maximum of 2 percent of collections(Talierco 2004).

Greater financial autonomy sometimes frees theARA from strict supervision of procurement. Forinstance, in Zambia, prior to the ARA all procure-ment had to go through the Ministry of Supply,with the Tender Board involved for procurementsthat exceeded a certain limit. The present procure-ment regulations for the ARA have abolished theintervention of the Ministry of Supply, butmaintained the requirement to involve the TenderBoard for larger contracts. This procedure substan-tially speeds up the overall procurement process.

Human Resources

Freedom from restrictive civil service rules forrecruitment and compensation of staff is one of

the major advantages of ARAs.19 However, not allARAs have the same powers over their staff. Peru’srevenue service SUNAT has full power and needs toconsult with no other authority regarding therecruitment and firing of its staff. Autonomy overstaffing matters is much more lacking in Ghana.Many ARAs, at their creation, took advantage of theopportunity to renew their staffing. Bolivia took a

42 Customs Modernization Handbook

BOX 2.3 Revenue Targets and Autonomy: Illustrations from Tanzaniaand Uganda

Neither the Tanzania Revenue Authority (TRA)nor the Uganda Revenue Authority (URA) hasautonomy in setting revenue targets. This hasimportant implications for both staff motivationand tax collection priorities. Foreign donors, par-ticularly the IMF, are actively involved in settingannual revenue targets, as is the MOF. The tax-to-GDP targets are announced in the budgetspeeches, and are written into the Policy Frame-work Papers that the government cosigns withthe IMF.

While the MOF and the IMF publicly agreeabout revenue targets in both Tanzania andUganda, many staff members of the TRA andURA complain about their own lack of influencein setting the revenue targets. Both TRA andURA staff consider the budget targets unrealisti-cally high, based on expenditure needs ratherthan revenue potential. Others point out thatthe international comparison of tax shares fre-quently used to argue for the existence of largeuntapped revenues, and hence for the legiti-mate expectations of better TRA and URA per-formance, has a shaky empirical basis. First, GDPfigures themselves are subject to discussion. Sec-ond, straight tax share comparisons fail to takeinto account the differences between countrieswith respect to economic structure (for exam-ple, the size of small scale agriculture and theextent of the mining sector), income per capita,urbanization, tax policies, and so forth.

The focus of the MOF and the IMF on shortrun revenue maximization also translatesdirectly into a TRA and URA concentration on

the larger known taxpayers, as reflected in theestablishment of large taxpayers’ departmentsthat draw resources from the other revenuecollecting departments within the revenueauthorities. Hence, the targets have substantialinfluence on the way the revenue authorityallocates its internal resources as well as on staffmorale.

In Uganda, the relations between the MOFand the URA have deteriorated over the years asthe URA has failed to meet its targets. The MOFand the URA frequently have quite differentviews about revenue collection targets and theiranalytical basis. On the one hand, the MOFregards itself as the key tax policymaker. On theother hand, the URA has the administrativeexpertise without which realistic target settingand tax policy cannot be accomplished.

In contrast, the relations between the MOFand the TRA seem to be more harmonious. Thismay be due to the special policy role theResearch and Policy Department plays in theTRA, of setting revenue targets for the revenuedepartments once the total tax revenue budgethas been agreed on with the Ministry. Thisarrangement indicates a strengthening of thetax bureaucracy at the expense of politicians.There is, of course, the issue of moral hazardwhen the tax collection agency becomesinvolved in the process of setting its own per-formance targets.

Source: Fjeldstad, Kolstad, and Lange 2003;Therkildsen 2003.

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 ServiceCommission assumes all personnel responsibility for customs: itidentifies potential staff, holds entry examinations, selects staff,and allocates them to departments. It is also responsible for pro-motions, the performance appraisal system, filling vacancies,and disciplinary matters.

systematic approach to ensure that its staff corre-sponded to the desired professional and integrityprofile (see box 2.1). Peru and Tanzania also imple-mented a drastic policy of staff renewal at the cre-ation of the ARA. Zambia was less successful as thenew recruits were selected from a list provided bythe MOF, so the process was not as free as it couldhave been from regional and ethnic considerations.The Kenya Revenue Authority did forgo the oppor-tunity to change its staff. In Uganda, most of therevenue administrations’ staff retained their posi-tions when the URA was created. Staff renewal isexpensive as staff must be bought out (in Peru, forexample, staff that resigned received three yearscompensation for a total of US$1 million, plusUS$1 million of pension improvements) and newstaff must be offered competitive compensation.Not all ARAs have used their newly gainedautonomy to embark on a sustained training pro-gram, thereby undermining somewhat the qualityenhancement they gained by revamping therecruitment procedures.

In several cases, the staff renewal process was usedto upgrade the overall skill mix of staff. For example,in 1991, out of 4,000 staff members in Peruvian cus-toms, only 2 percent had a university degree and aconsiderable proportion were unsalaried assistants,living solely on tips and gifts. By 2000, 55 percent ofthe staff had university diplomas and the pro bonostaff category had disappeared.

Compensation

Staff salaries were increased substantially in allARAs with the express objective of being able torecruit and motivate qualified personnel. This wasparticularly important in attracting staff withexpertise in IT, finance and budgeting, investiga-tion, and accounting. Policies with respect to pro-motions and salary advances were also made moreflexible and could be brought in line with staff per-formance. Better salaries were also intended toreduce corruption, as well-paid staff are less likelyto engage in corrupt practices, given the lesser needto seek out bribes to supplement their officialsalaries to sustain their families. Also, when firedfor corruption, it is more of a penalty to lose a highpaying job than to lose a poorly paid job. In Peru,for instance, salaries were increased by a factor of10, while in Tanzania the salaries were set at a level

that was 10 times that of the civil service. In Ghanaand Uganda, staff salaries were brought in line withthose paid at the central bank, which in Uganda waseight to nine times the level of salaries paid in thecivil service. Salary adjustments also allowed forgreater differentiation between higher-level andlower-level staff, akin to what is practiced in theprivate sector.20

Lessons from Experience

Now that ARAs have been operating in the develop-ing world for about 20 years, some factors can beisolated that, if given proper attention, contributeto their success.

• Political support. The ARAs that proved mostsuccessful were those that benefited from high-level political support. Where political supportwavered, the experiments were less successful.

• Autonomy. When MOF appointees dominatethe board of directors, the ARA has less opera-tional autonomy, and some degree of micro-management by the board, including in selec-tion of positions, may emerge (URA, forexample). It would appear that having privatesector representatives on the board makes cus-toms more attuned to private sector concerns.There is the danger, though, that those privatesector representatives are not fully independentof the public sector, and may have been selectedfor their party or social affiliations. Politicalinterference is always a risk, particularly withrespect to staff appointments. With higher staffcompensation such interference becomes moretempting. Political interference may also takeplace in seeking preferential treatment for indi-vidual traders and cargo, or in providing exemp-tions (Fjeldstad, Kolstad, and Lange 2003). InUganda, the MOF is seen as dominating theboard, thus undermining the autonomy of theURA (Therkilsen 2003).

• Compensation levels. Some ARAs have encoun-tered serious difficulties in maintaining their

Human Resources and Organizational Issues in Customs 43

20. At the URA in 2000, the top-level wages were 34 times thelower-level wages, a differentiation that led to resentment whena 10 percent bonus was granted and staff focused on the absolutevalue of these bonuses given to top-level staff, which was a mul-tiple of the total salary of low-level staff (Fjeldstad, Kolstad, andLange 2003, p. 15).

competitive compensation levels. In Uganda, thepremium over civil servants’ salaries fell from amultiple of about eight to nine in 1991 to a mul-tiple of four to five at present. In Tanzania, manyyears of salary freezes also caused an erosion ofthe salary premiums paid to staff. In Ghana, too,salaries at the ARA have, over the years, not keptup with inflation and with the increases in pri-vate sector compensation packages. Much couldbe gained by having a clear compensation pol-icy, the application of which is periodicallymonitored by independent auditors. Also, fraudthat goes beyond “facilitation money” canhardly be stemmed with good wages, as the sizeof bribes can often represent a multiple of theannual salaries of staff. It is thus important toensure that good wages are backed with effectivedisciplinary action for poor performance andbribery. In the absence of such discipline, goodwages can replace poorly paid corrupt staff bywell paid corrupt staff—not much of a gain.

• Revenue generation. Establishing ARAs seems tohave helped to mobilize larger revenues, certainlyin the first years of their existence. However, suchsuccess has not always been sustained.

• Integrity. Corrupt networks can easily reestab-lish themselves after one year (often at the endof the probationary period for new staff)(Fjeldstad, Kolstad, and Lange 2003). The Com-missioner of the URA noted in 2003 that“corruption is the number one problem.”

The experience so far has shown that providing cus-toms with greater operational autonomy can sub-stantially contribute to enhancing its effectivenessand efficiency. This deserves to be studied as anoption for modernizing customs. However, theexperience so far also shows that autonomy is only afacilitating condition, not a solution for all prob-lems facing customs. Results are best when customsuses its autonomy to engage in a full modernizationinitiative (such as in Peru), and where autonomy isrespected over the years. The results are weakest,and even unsustainable, when customs delays thismodernization process. In both Ghana and Uganda,for instance, the introduction of computerized cus-toms operations and the associated simplificationof procedures and effective staff training wasdelayed for more than 10 years after the creation ofthe ARAs, and prevented the ARAs from fully reap-ing the benefits of their greater autonomy.

Management Contracts

Contracting with private parties to assist govern-ments in the collection of taxes is not new.21 His-tory abounds with examples of tax farming, underwhich the taxation function itself was given undercontract to a private citizen or a group of citizens.Typically the contract was limited in time, grantedas a favor, and later sold to the highest bidder, whowas entitled to keep any revenues raised above thecontracted amount. Tax farming occurred in Egypt,Rome, Great Britain, and Greece. When first intro-duced in France during the 13th and 14th cen-turies, there were hundreds of tax farms, whichwere allocated using competitive auctions. By the1680s, however, there was a single tax farm monop-oly known as La Ferme Générale responsible forcollecting all indirect taxes in France. Historianstypically portray the members of La Ferme Généraleas massively corrupt and estimate that less than halfthe money collected from French citizens ended upin the French treasury. When La Ferme Généralewas abolished in 1791, 30 members were guil-lotined, a clear sign of the aversion of the newregime to this type of tax collection.22 Anotherexample of relying on the private sector to assist inlevying taxes, albeit a much more limited one, is thepractice of contracting preshipment enterprises toassist customs in the determination of the value ofimports (see chapter 8).

Today’s management contracts are quite differ-ent from either of these two practices. They alsodiffer from the Build, Operate, and Transfer(BOT) contracts mostly used in infrastructureoperations, where private parties invest in andmanage structures for an agreed on period, andfrom the Build, Operate, and Own (BOO) con-tracts under which enterprises run public facilitiesor public utilities to reap efficiency gains throughthe application of management expertise.

Management contracts in customs services are adrastic approach to customs modernization, and

44 Customs Modernization Handbook

21. This section draws heavily on the Mozambique case studyby Mwangi (2004); Hubbard, Delay, and Devas (1999); and docu-mentation provided by Crown Agents.

22. In 12th century Morocco, the rulers granted tax-farmingprivileges to Christian and Jewish traders, as they were in thebest position to extract tribute and customs fees from foreigntraders, and the ruler trusted them more than his national offi-cials, whom he suspected of massive fraud. This practice contin-ued at least until the 17th century (Administration des Douaneset Impots Indirects 2001, pp. 101, 121).

have dual objectives. In contrast to tax farming,only the management of the government’s taxationfunction is privatized. A contractor’s responsibili-ties are twofold: First, it must manage the customsservice and ensure that its major responsibilities areimplemented effectively and efficiently; often theprime interest is in revenue generation, but tradefacilitation comes a close second. Second, the con-tractor is to train national staff to take over the fullset of responsibilities of customs within a giventime frame. In return, the contractor is paid a fixedcompensation, possibly complemented by aperformance-related payment. Any evaluation ofsuch management contracts must keep these dualobjectives in mind—raising revenue and building anational customs service. Also, any assessment ofthe cost of the management contract must considernot only what it costs to run customs during theperiod of the contract, but what resources wouldhave been required to attain these objectivesthrough other, maybe less drastic, approaches. Suchevaluation is complicated by the fact that the costand effectiveness of alternative approaches are notobservable variables.

The practice of using management contracts hasso far been limited to Mozambique and Angola,23

but it is a customs development model that isreceiving increasing attention, and several othercountries are actively looking into this approach.The main features of the management contractapproach is discussed using the Mozambique con-tract as an example, as this is the most completeapplication of the management contract approachand has been in place long enough to provide use-ful lessons.

In the mid-1990s, the government of Mozam-bique (GOM) saw the need to modernize its Cus-toms Services, which, as a result of many decades ofcivil war, were dysfunctional and thus unable toundertake revenue mobilization and trade facilita-tion responsibilities. Bilateral and multilateraldevelopment partners supported this initiative andaccompanied it with advice and financial resources.GOM made the bold decision to grant a manage-ment contract to run customs and to preparenational authorities to assume full responsibilityfor customs operations at the end of the manage-ment contract. In 1995, GOM created a Technical

Unit to Restructure Customs to manage the pro-posed reform and the tendering for consultantservices, as well as to oversee the implementation ofthe contract and the necessary changes in customslegislation. The Technical Unit was also to coordi-nate with all other government agencies involved intrade and customs issues. Following a process ofcompetitive bidding (25 organizations tendered)Crown Agents (CA) was granted a three-year man-agement contract. The contract specified CA’sresponsibilities:

• take over the complete management of customsand bring on board key customs officials to per-form the contracted functions in accordancewith the local employment laws

• train national customs staff to take over fromCA at the end of the contract

• fully implement customs legislation andexchange regulation

• maintain customs’ assets in good order and pre-pare an effective asset inventory

• procure and maintain equipment allocated tothe reform project.

The initial contract was for US$37 million, 43 per-cent of which was paid by DFID. At the outset ofthe reform, CA appointed 60 experienced expatri-ate customs staff to take up managerial and train-ing positions. CA gradually introduced its propri-etary customs information system and managedthe restaffing program, redesigned customs proce-dures, and assisted in preparing the new legislation.The contract was extended twice (for three years in1999 and for two years in 2003, at which time therewere only 11 CA staff members working on theproject). The extension of the contract in 2003specified that CA was to assist in the merging of therevenue function of customs, VAT, and direct taxby 2005 and in the preparation for the establish-ment of an ARA. The major reason for these exten-sions was that the national management team wasstill fragile, because a number of management posi-tions had not yet been filled and the restaffing wasstill not complete. Integrity problems were found tobe very resilient to change and strict application ofthe new customs procedures needed to be morefirmly rooted.

From both revenue and trade facilitation anglesthe results achieved have been impressive. However,the handover to national customs authorities was

Human Resources and Organizational Issues in Customs 45

23. Crown Agents (CA) signed a management contract with thegovernment of Angola in 2000 and initiated its activities in 2001.

much slower than expected and corruption prob-lems are still a major issue.

• Revenue performance. Revenues rose fromUS$105 million in 1996—the year before the CAcontract—to US$233 million in 2002, suggest-ing that the project had essentially paid for itself.In 1996–99 the average annual revenue increaseover the 1996 revenues was four times the cost ofthe CA project.

• Release times. Customs release times also gradu-ally improved and by 2003 the majority of qual-ifying goods were cleared within 48 hours andmost were cleared in 24 hours. In 2000, the aver-age clearance time was estimated at 18 days, andwas still as high as 8 days in mid-2002. All in all,it is estimated that clearance times are now40 times faster than before the reforms.

• Management handoff. The initial contract seri-ously underestimated the complexity of handingover customs management, causing severalcontract extensions. Also, the staff renewalprocess (80 percent of the staff was to be replaced)was delayed because of national legislation andwas still not completed by mid-2003.

• Corruption. Corruption still plagues the cus-toms operations, in part because strict adher-ence to the new customs procedures is stillinadequate.

The CA contracts in Mozambique and Angola canbe checked against best practices for managementcontracts for public service, which specify that pay-ment to the contractors should be performancerelated and that interference by the government indaily management should be minimal. The com-plexity24 and novelty of the operation, both forGOM and for the contractors; the uncertainty sur-rounding the whole project; and the multipleobjectives of the project made it difficult to realisti-cally assess whether the outcomes were achievable.Further complications arose from the poor state ofinformation systems to provide both before-the-fact benchmarks and progress indicators. Also, fewcontractors were available that could provide assur-ance that they could undertake the task for whichthey were bidding, so that competition could not be

exploited to its fullest extent to adjust the contractterms. It is therefore not surprising that the role ofperformance-related compensation to the contrac-tor was small in the overall compensation agree-ment. GOM did fully support the project and pro-vided the necessary logistical and moral supportand did not interfere with the day-to-day opera-tions of the customs services. This hands-offapproach enabled the contractors to devote them-selves to implementing their commitments.

All in all, the management contract approach isa bold approach and appears to be a workable onein circumstances where alternative approaches areless promising and where quick results on the rev-enue front are highly desirable. However, it is stilla rather new approach to customs modernizationin extraordinary circumstances. The jury is stillout with respect to the sustainability of thereforms and the full transfer to the national cus-toms. It would appear that eventual new initiativesalong these lines should be custom designed andshould take local circumstances into account,including the availability of trained local staff andthe functioning of customs in premodernizationyears. These factors will be featured in a gooddiagnostic analysis that should precede any nego-tiation with external service providers. Similarly,such diagnostic analysis should define specificperformance criteria for the service providers.Any contract with service providers should con-tain clear milestones for the transfer to nationalcustoms authorities, a precondition for sustain-ability of the reform.

Operational Conclusions

The task of customs is becoming increasingly com-plex given the sharp increase in trade, the greatersophistication of traders, and the multiple andshifting objectives imposed on customs. Unifor-mity of customs operations across the territory andacross cargo categories is important, and speedyrelease of goods is crucial to the competitiveness oftraders. There is also a need to adhere to interna-tional standards on value and classification, as wellas regional standards on rules of origin. It is thusobvious that customs organizations need to adjustto these challenges, manage staff and proceduresaccordingly, and find the organizational formulabest suited for their particular circumstances.

46 Customs Modernization Handbook

24. The agreed on program plans were made up of 700 specificbut related task areas, some of which had 20 subcomponents.

Four summary conclusions are in order:

• Good HR management is the linchpin to effec-tive and efficient customs management. This istoo often neglected, and the delivery of services,in all its dimensions, all too often suffers whileintegrity problems persist. The management ofhuman resources is multifaceted. It includesrecruiting, training, staff compensation andpromotion, as well as enforcement. None ofthese tasks is easy, and often must be imple-mented in a constrained environment. Budgetsare tight and civil service rules give little leewayto the HR staff in customs. These difficultiesshould not discourage the investigation of newinitiatives, and field studies do suggest thatwithin these constraints much more attentionshould be given to HR issues, and generous pay-offs can be expected. Strengthening the HRdepartment would often be a good beginning.

• Recent examples of ARAs are promising. Theycan free customs from rigid civil service rules,give them more budgetary and financial auton-omy, and generally provide greater flexibility inoperational matters. However, experience hasshown that creating an ARA is no guarantee forimproved customs services. It does not replace amodernization program that should include, atthe very least, the introduction of simplifiedprocedures, the strict enforcement of integritypolicies, and the introduction of advanced ITsystems. Aside from providing higher wages ini-tially and weeding out some staff from the oldsystem, modern HR policies must be main-tained—otherwise all progress achieved willquickly erode. This includes avoiding the ero-sion of the compensation premiums granted atthe creation of the ARA. ARAs should also payfull attention to training, and have diligentrecruitment policies. The institution’s autonomyshould also be protected from undue interfer-ence from the MOF.

• Management contracts can improve customsoperations if they are well designed and moni-tored. So far these management contracts havelargely been tested in special circumstances. Inboth Mozambique and Angola, the countriesemerged from many years of civil strife and fromdysfunctional public administrations. Engagingprivate service operators in those countries had

the advantage of substantially improving therevenue performance in the short run under dif-ficult circumstances. The track record for trans-ferring management capabilities to nationals isstill being tested, but initial reports suggest thatthis has proven more difficult than initiallyimagined. It certainly has taken more time thanenvisioned at the start of the exercise. New man-agement contracts may pay special attention toidentifying performance-based remunerationand to building up the necessary informationsystems to monitor the performance indicators.

• Whatever the organizational model chosen, gov-ernments must provide customs with theresources required to permit customs to operateeffectively and efficiently.

Annex 2.A Human ResourcesChecklist

This chapter makes the point that human resourcesmanagement is probably the single most importantissue affecting the ability of customs to achieve itsassigned objectives effectively and efficiently.

Without providing an exhaustive list of issuesthat would need to be looked into to assess theavailability of these human resources and the qual-ity of HR management, there are a few priorityareas that could be investigated as starting pointsfor more in-depth investigation.

• Skill mix. Obtain information on the skills andqualifications of customs staff and compare thiswith the skill mix required to enable the imple-mentation of the near- and medium-term mod-ernization program.

• Human Resources Department. Does the HRDepartment have a strategic vision? How is itstaffed? What are its activities in the fields ofrecruitment, training, and career planning?

• Recruitment. What is the present recruitmentprocess? Is customs or a Civil Service Ministry incharge? Does customs have a forward-lookingrecruitment program so it can adjust its skillmix over time, and do the present recruitmentpractices enable it to implement this program?

• Training. What is the training program at cus-toms? Is there a dedicated training institute? Arethe staff and curriculum attuned to the modern-ization process? Is training provided for staff onboard or only for new recruits?

Human Resources and Organizational Issues in Customs 47

• Compensation. Is compensation at customsguided by the same rules that apply to the rest ofthe civil service?

• Level of compensation. How does compensationat customs compare with compensation in therest of the civil service, and with the private sec-tor? Does entry level compensation provide aliving wage?

• Bonus and salary supplements. Is there a systemof bonuses and premiums that supplementsbasic wages? Are these additional compensationpackages distributed equally to all staff or dothey provide an incentive for good perform-ance? Is the system of bonuses SMART (spe-cific, measurable, achievable, relevant, andtimed)?

• Additional employment benefits. Do staff haveaccess to housing, health care, or pensionbenefits?

• Career management. Is advancement based onseniority or performance? What rules exist formobility (geographic and across services)? Arethe rules transparent?

• Enforcement of discipline. Is there a clear code ofconduct and a stipulated system for sanctions?What are the internal disciplinary processes anddo they function in a transparent and timelymanner?

• Staff satisfaction survey. Is there a periodic sur-vey to assess staff satisfaction? What was man-agement’s reaction to the survey if such a surveywas performed?

Annex 2.B Management ContractsChecklist

Modern management contracts are a relatively newapproach to customs modernization. Under suchcontracts a private firm manages customs and pre-pares the national customs authorities to take overat the end of the contract. These contracts have sofar been largely undertaken in countries recoveringfrom civil war and where the civil service isextremely weak. Issues that deserve close attentionwhen considering management contracts includethe following:

• A good diagnostic study should establish thepresent practices and the difficulties thatprevent modern customs practices from being

implemented. This diagnostic assessmentshould address whether the present situation isamenable to correction using the traditionaltechnical assistance approach, or whether thesituation warrants a more unconventionalapproach such as management contracts.

• A transparent and competitive tenderingprocess for the management services should beopened, and a careful exercise for prequalifica-tion should be undertaken.

• A good description of the tasks tendered (man-agement and transferring capacity) should beprovided.

• The contract should adhere to well-defined pro-curement rules, with emphasis on transparencyand clarity of services rendered.

• Details on expected performance criteria (rev-enue, trade facilitation, efficiency, and effective-ness) and possible benchmarks should beprovided.

• Responsibilities for ultimately transferring man-agement functions to nationals should be clearlydefined.

• Availability of financial and oversight supportfor the duration of the contract should be inves-tigated.

Annex 2.C Checklist forAutonomous Revenue Agencies

The issue is frequently raised as to whether trans-forming an existing customs organization into anARA should be considered as part of the solution tomodernizing a customs administration in a givencountry. When considering this option, it is worth-while to contemplate the following issue: Whatmajor reasons prevent customs from attaining itsobjectives as effectively and efficiently as desired?The response to this question will be derived fromthe diagnostic study.

The major advantage that an ARA provides isgreater autonomy in matters of human resources(salaries, staff renewal at the outset to ensure thatthe desired skill mix is available, career manage-ment from recruitment through retirement) and inthe determination of its budgetary envelope, andthe ease with which these resources can be usedboth for recurrent and investment purposes.

To the extent that the shortcomings of a customsadministration derive from these issues it will be

48 Customs Modernization Handbook

important to see if, within the specific country cir-cumstances, the promises of an ARA can be real-ized. The issues to consider include the following:

• Is the political support present to engage in staffrenewal at the outset? This may include declar-ing all positions vacant and recruiting new staffin a transparent manner.

• Is it possible to introduce a credible and trans-parent method to select those that the newadministration wants to attract?

• Are there financial resources available to providetermination packages for staff not selected forthe new organization?

• What are the chances that a different and highersalary scale will be provided to the staff of theARA and that this pay differential with the othercivil services will be sustained? What is thepower of the civil service unions—or of similarorganizations—to prevent such differentiationin compensation?

• What are the chances that the necessary finan-cial resources will be forthcoming and sustainedto permit the payment of salary premiums toARA staff?

• Would the MOF be willing to grant the financialautonomy implied by an ARA? Would thisextend to the investment budget?

• Is there a tradition of micromanagement andinterference by the MOF that could impede theindependence of the ARA?

• What assurance is there that the board of theARA will have sufficient autonomy to make thenecessary decisions beneficial to the operationof the ARA?

• Is the process of selecting the board and theARA manager likely to provide good managers?

If these shortcomings are derived from other issuessuch as lack of automation, major integrity prob-lems, or complex and nontransparent procedures,then it will be important to see to what extent

• new and independent management will tacklethese issues

• international donor organizations are willing toassist the ARA in its initial years to engage inthese basic reform issues, either with advice orwith financial support

• the likelihood exists that the proposed ARAmanagement either has a modernization visionor will be open to acquiring such a vision.

Clearly, if the motive for the introduction of theARA rests solely on the possibility of providinghigher salaries to ARA staff, it is unlikely that thecreation of an ARA will promote the moderniza-tion agenda.

Further Reading

Castro, Patricio, and James T. Walsh. 2003. “The Organization ofCustoms Administration.” In Michael Keen, ed. ChangingCustoms: Challenges and Strategies for the Reform of CustomsAdministration. Washington, D.C.: International MonetaryFund.

De Wulf, Luc. 2004. “Salary Bonuses in Revenue Departments:Do They Work?” PREM Note 84. Poverty Reduction andEconomic Management Network. Washington, D.C.: WorldBank.

Fjeldstad, Odd-Helge, Ivar Kolstad, and Siri Lange. 2003. Auton-omy, Incentives and Patronage, A study in Corruption in theTanzania and Uganda Revenue Authorities. Development Stud-ies and Human Rights. Michelsen Institute. Oslo, Norway.www.cmi.no/publications/publication.cfm?pubid=1688.

Taliercio, Robert. 2004. “Administrative Reform as CredibleCommitment: The Impact of Autonomy on RevenueAuthority Performance in Latin America.” World Develop-ment 32(2): 213–32.

References

The word processed describes informally reproduced works thatmay not commonly be available through libraries.

Administration des Douanes et Impôts Indirects. 2001. LaDouane Marocaine a Travers l’Histoire. Rabat.

Castro, Patricio, and James T. Walsh. 2003. “The Organization ofCustoms Administration.” In Michael Keen, ed. ChangingCustoms, Challenges and Strategies for the Reform of CustomsAdministration. Washington, D.C.: International MonetaryFund.

De Wulf, Luc. 2004. “Salary Bonuses in Revenue Departments:Do They Work?” PREM Note 84. Poverty Reduction andEconomic Management Network. Washington, D.C.: WorldBank.

Fjeldstad, Odd-Helge, Ivar Kolstad, and Siri Lange. 2003. Auton-omy, Incentives and Patronage, A study in Corruption in theTanzania and Uganda Revenue Authorities. DevelopmentStudies and Human Rights, Michelsen Institute, Oslo, Norway.www.cmi.no/publications/publication.cfm?pubid=1688.

Hubbard, Michael, Simon Delay, and Nick Devas. 1999. “Com-plex Management Contracts: The Case of Customs Adminis-tration in Mozambique.” Public Administration and Develop-ment. 19(2):153–163.

IDB (Inter-American Development Bank). 2001. “Institutional-izing Human Resources Management in Bolivia’s CustomsAdministration.” In Customs Best Practices in East Asia andLatin America. Washington, D.C.

Mwangi, Anthony. 2004. “Mozambique.” In Luc De Wulf andJosé B. Sokol, eds. Customs Modernization Initiatives: CaseStudies. Washington, D.C.: World Bank.

Human Resources and Organizational Issues in Customs 49

PLS RAMBOLL. 2001. Supporting Institutional Reforms in Taxand Customs: Integrating Tax and Customs Administrations.Study prepared for the World Bank and supported by theDanish Governance Trust Fund. Washington, D.C.www1.worldbank. org/publicsector/tax/Taxandcustoms-finalreport.doc.

Steenlandt, Marcel, and Luc De Wulf. 2004. “Customs Pragma-tism and Efficiency: Philosophy of a Successful Reform:Morocco.” In Luc De Wulf and Jose Sokol, eds. CustomsModernization Initiatives: Case Studies. Washington D.C.:World Bank.

Talierco, Robert. 2002. Designing Performance: The Semi-Autonomous Revenue Authorities in Africa and Latin America.draft. Washington, D.C.: World Bank. Processed.

———. 2004. Organizational Design Profiles of Semi-AutonomousRevenue Authorities in Developing Countries. Washington,D.C.: World Bank. www1.worldbank.org/publicsector/tax/autonomy.html.

Therkildsen, Ole. 2003. “Revenue Authority Autonomy in Sub-Saharan Africa: The Case of Uganda.” Paper presented at theWorkshop on Taxation, Accountability and Poverty atthe Annual Conference of the Norwegian Association forDevelopment Research (NFU) “Politics and Poverty.” Oslo.October 23–24.

Van Rijckeghem, C. V., and B. Weber. 1997. “Corruption and theRate of Temptation: Do Low Wages in the Civil ServiceCause Corruption?” Working Paper WP97/73. Washington,D.C.: International Monetary Fund.

50 Customs Modernization Handbook

51

3LEGAL FRAMEWORK FOR

CUSTOMS OPERATIONSAND ENFORCEMENT ISSUES

Kunio Mikuriya

TABLE OF CONTENTS

The Need for Modern Customs Legislation 52

The Revised Kyoto Convention 53

Preparing a Modern Customs Code 57

Potential Obstacles to CustomsModernization 58

Enforcement of Customs Laws 63

Model Legislation for InternationalProperty Rights 64

Operational Conclusions 64

Further Reading 66

References 66

LIST OF BOXES

3.1 An Example of Obsolete CustomsLegislation 52

3.2 Sample Checklist to Identify ProvisionsRequiring Amendment or New Legislationunder the Revised Kyoto Convention 59

3.3 Morocco’s Adoption of the Convention:A Success Story 60

3.4 Modernization of Customs Legislation in theRussian Federation 65

Customs plays a crucial role in trade operationsand revenue collection, and it directly affects theprivate rights and obligations of citizens. Customsis also expected to play an active role in protectingsociety and national security from cross-bordermovements of prohibited or restricted goods,including illicit drugs, counterfeit goods, endan-gered species, and weapons of mass destruction.Consequently, customs operations require a solidlegal framework within which duties can be dis-charged. Without an effective legal framework thatguarantees transparent, predictable, and promptcustoms procedures, the international private sec-tor will find it highly cumbersome to conduct busi-

ness with or to invest in a country in a competitiveinternational business environment. It is, therefore,of critical national interest for every country tomaintain its customs activities at high levels ofeffectiveness buttressed by a legal system that meetsinternationally accepted standards.

In response to dramatic increases in trade volumeand heightened requirements for security, many cus-toms administrations are reviewing their operationsin the context of international standards and bestpractices to assess the need for introducing legalreforms. Modernization of customs laws, regula-tions, and supporting legal systems is essential formodern customs administrations to cope with theincreasing demands for their services. The Inter-national Convention on the Simplification andHarmonization of Customs Procedures (entered

Many thanks to Ms. Mashiho Yuasa, law student at the Univer-sity of Michigan Law School, for her help in research.

into force in 1974 and revised in June 1999), alsoknown as the Revised Kyoto Convention, providesan excellent blueprint for such reforms (WCO 1997).

The Revised Kyoto Convention was developed tostandardize customs policies and procedures world-wide. It embodies best practices of national legisla-tion around the world, and its implementationwould enable countries to meet international com-mitments concerning trade and border procedures,including the rules of the World Trade Organization(WTO).1 At the same time, the Convention enableseach country to tailor its policies and procedures tomeet its unique legal, political, cultural, and societalrequirements. Other customs legislation, such as theCustoms Code of the European Community (theEU Code), is closely aligned with the Convention(European Union 1992).

This chapter discusses the need to modernizecustoms legislation in the context of internationallegal standards and examines possible difficultiesin its implementation and enforcement. The

chapter also briefly touches upon other legalinstruments that complement existing interna-tional legislation. The first section focuses on theneed for modern customs legislation. The secondsection provides a brief overview of the RevisedKyoto Convention. The third section discusses theprocess of preparing a modern Customs Codewhile the fourth section reviews the potentialobstacles to a modern Customs Code. The fifthsection discusses the process of enforcing customslaw. The sixth section focuses on model legislationfor intellectual property rights. The final sectionsummarizes the main operational implications ofthe chapter.

The Need for Modern CustomsLegislation

The realities of modern international trade havemade it necessary to modernize customs legislationin many countries. Outdated customs laws con-strain social and economic progress by acting assignificant nontariff trade barriers (box 3.1). Theyprevent effective revenue collection, discourage for-eign trade and investment, and potentially threatensocial and national security.

52 Customs Modernization Handbook

1. For example, General Agreement on Tariffs and Trade (GATT)1994, Articles V, VIII, and X, and Agreement on Implementationof Article VII of GATT 1994 (WTO Valuation Agreement).GATT 1994 Article V discusses transit; Article VIII, fees andformalities; and Article X, publication and appeals.

BOX 3.1 An Example of Obsolete Customs Legislation

When Yugoslavia broke apart in the early 1990s,the newly independent republics inherited theYugoslav Customs Code, which was, by socialiststandards, considered to be relatively useroriented. However, the shortcomings of theYugoslav Code became rapidly apparent.

Designed for foreign trade exchanges largelymanaged by the state or state-run entities, it didnot envisage the rapid surge in the number ofoperators. Procedures that were designed forestablished corporations were no longer applica-ble. For example, deferred payment was nolonger realistic until the reliability of new marketentrants had been assessed. In addition, the oldcode was too detailed and quite bureaucratic. Itwent to the extent of determining the openinghours of customs offices, which was unrealisticin a rapidly changing economic environment. Inan attempt to be user friendly, the old code arbi-trarily set the maximum time allowed for cus-toms to clear goods. In the new market econ-omy, customs had to deal with experienced

traders and novice importers within the sameamount of time. As a result, officials did not havethe time to properly examine suspicious transac-tions, as the prevailing impression was that, asall goods should be cleared in five hours, decla-rations could be held up by prolonged examina-tion of any one transaction. Worse, the YugoslavCode made it mandatory to inspect every con-signment, thus preventing the introduction ofselective examinations.

From the penal side, the code made a distinc-tion between individuals and legal entities. Intheory, penalties for legal entities that commit-ted customs fraud were higher than those forindividuals. This did not make much sense in amarket economy environment, and it led tonumerous disputes when the smaller businessesstarted getting involved in duty evasion, as itwas not clear if the company or an individualhad committed the offense.

Source: Zarnowiecki 2003.

Outdated customs legislation typically includesone or more of the following characteristics:

• no comprehensive body of customs-related leg-islation that establishes the clear competence ofcustoms

• noncore customs elements • inadequate provisions for complying with inter-

national commitments, including WTO agree-ments

• insufficient transparency and predictabilityreflected in the failure to provide basic informa-tion on matters such as rules, decisions, consul-tation mechanisms, and adequate appealsprocesses

• complex or redundant customs formalities thatdelay clearance and create opportunities forunnecessary discretionary interventions

• no provision for selective verification of cargobased on risk management, resulting in relianceon the 100 percent examination of consign-ments, which hinders customs from deployingits limited resources in an efficient and effectivemanner

• prohibition of advance lodgment of informa-tion or goods declaration2 or post-clearanceaudits3

• no provision for automation or electronic com-munication

• ambiguous provisions that bestow customs offi-cers with excessive discretionary power

• inadequate authority for customs to achieve itsenforcement and compliance goals.

A solid and modern legal framework is the founda-tion of effective customs operations. Such a frame-work should provide for customs-related legislationto accomplish the following:

• establishes the competency of customs authori-ties to administer and enforce customs laws,develop administrative regulations, adjudicateor settle cases, and make decisions on customsadministrative matters

• promotes transparency and predictability (forexample, timely dissemination of information,

advance rulings, independent audit, appealsprocesses)

• provides for modern customs systems and pro-cedures (risk management, audit-based control,and adequate automation)

• simplifies customs procedures (simplified decla-ration, advance lodgment, and so forth)

• encourages cooperation with other customsadministrations and with other governmentalorganizations

• provides for partnership with the private sector(formal consultations, for example)

• promotes customs integrity (clear rules that donot allow excessive discretion, unambiguousspecifications of customs’ officers authority andobligations, and so forth)

• provides for penalties proportional to the grav-ity of the offense (that is, penalties should besufficiently strong to deter customs violationsand promote compliance but should not beunjustly severe, especially when violations areminor—from the revenue and enforcement per-spectives—and nondeliberate)

• is accessible to the public• meets international standards.

The Revised Kyoto Convention

Since its inception in 1952,4 the World CustomsOrganization (WCO) has been working to developmodern principles that would buttress effective cus-toms administrations by examining customs poli-cies and practices worldwide, cooperating with itsmember administrations, and working with tradecommunities and international agencies. The earlyefforts for simplifying and harmonizing customsprocedures culminated in the Kyoto Convention,which was adopted by the WCO in 1973 and enteredinto force in 1974. Globalization, rapid transforma-tion of international trade patterns, and advances ininformation technology (IT) since then have com-pelled the WCO and its members to review andupdate the Convention. The resultant revision ofthe Convention, known as the Revised Kyoto Con-vention, reflects the economic and technological

Legal Framework for Customs Operations and Enforcement Issues 53

2. An essential basis for intelligence-based risk management.

3. An important element for the effective implementation of theWTO Valuation Agreement.

4. Established as the Customs Cooperation Council (CCC) in1952; the current name, the World Customs Organization, wasadopted in 1994.

changes and incorporates best practices of memberadministrations. The Revised Kyoto Conventionwas adopted by 114 customs administrationsattending the WCO’s 94th Session in June 1999.

Elements of the Revised Kyoto Convention

The Convention is an international instrumentdesigned to standardize and harmonize customspolicies and procedures worldwide. Customsprocesses based on national customs legislationthat are consistent with the Convention will enablecustoms to process imports, exports, and interna-tional travelers more smoothly. Elimination ofdivergent customs procedures and practices aroundthe world will permit international businesses tomeet their customs obligations effortlessly. Addi-tionally, the Convention can serve to implementcustoms-related principles developed by the WTO,such as Articles V, VIII, and X of the GATT of 1994.

The Convention consists of the Body of theConvention, the General Annex, and the SpecificAnnexes.5 The main Body of the Convention is aconcise 14-page document that sets forth in its Pre-amble the key principles of modern customsadministrations, and refers to the General Annexand Specific Annexes that are constituent parts ofthe Convention. The Articles of the Conventionprovide clear rules of accession to and administra-tion of the Convention. The Preamble of the Con-vention states the following as guiding principles:

(a) application of customs procedures and prac-tices in a predictable, consistent, and transpar-ent manner

(b) provision of information on customs laws, reg-ulations, procedures, and practices

(c) adoption of modern techniques, such as riskmanagement and maximum practicable use of IT

(d) cooperation, where appropriate, with othernational authorities, other customs administra-tions, and the trade community

(e) implementation of relevant international stan-dards

(f) provision of easily accessible administrative andjudicial review to affected parties.

The General Annex contains the core customs poli-cies and procedures, and the Specific Annexes coverthe individual customs procedures and practicesrelating to import, export, transit, processing, andenforcement measures. The Convention mandatescountries to accede to the provisions in the GeneralAnnex and requires them to automate data systems,cooperate on trade, implement risk managementtechniques, and create a mechanism to maintainand update the Convention. The Specific Annexescontain recommended practices. In addition tothese legal documents, there are detailed guidelinesand best practices to assist countries in understand-ing how to implement the Convention.

Forty of the contracting parties to the existingConvention must ratify the Protocol of Amend-ment for the Revised Convention to enter intoforce. Thus far, 35 contracting parties have ratifiedit6 while others are in the process of completingtheir national procedures.7 Many countries havealready reviewed their national legislation based onthe Revised Kyoto Convention, without waiting forits formal entry into force.

Overview of the Convention

The Convention presents a comprehensive set ofover 600 legal provisions outlining basic principlesfor all customs procedures and practices.8

The General Annex The General Annex stipu-lates the core principles for all customs proceduresand practices to ensure that these are uniformlyapplied by customs administrations. These princi-ples include the following: (a) standardization andsimplification of goods declaration and supportingdocuments, (b) minimum necessary control, (c)risk management and audit-based control, (d) fast

54 Customs Modernization Handbook

5. The WCO gives the text of the Body of the Convention andthe General Annex and Specific Annexes on its Web site. The fulllegal text of the Convention and the implementation guidelinescan be purchased from the WCO at www.wcoomd.org/ie/En/Topics_issues.

6. Algeria, Australia, Austria, Belgium, Bulgaria, Canada, China,Czech Republic, Denmark, European Community, Finland,France, Germany, Greece, Hungary, Ireland, Italy, Japan, Republicof Korea, Latvia, Lesotho, Lithuania, Morocco, Netherlands, NewZealand, Poland, Slovakia, Slovenia, South Africa, Spain, Sweden,Switzerland, Uganda, United Kingdom, and Zimbabwe.

7. The Council of the European Union, for its 15 member states,in March 2003, and the President of the United States in May2003, approved the Convention.

8. These provisions include Standards, Transitional Standards,and Recommended Practices. Standards must be implementedwithin 36 months of ratification, while Transitional Standardshave a 60 month implementation period. Reservations are per-mitted to recommended practices in Specific Annexes.

track procedures for authorized persons and enti-ties, (e) coordinated interventions with other agen-cies, (f) maximum use of IT, (g) transparencyand predictability, and (h) availability of appealsprocesses.

The General Annex covers the main customsfunctions in its Definitions, Standards, and Transi-tional Standards, all of which have the same legalvalue. The Convention mandates the acceptance ofthe General Annex for accession. No reservationsare permitted. The General Annex is divided into10 chapters.

Chapter 1: General Principles. This chapterexpresses the two driving principles of the Conven-tion, which are the simplification and harmoniza-tion of customs procedures. It stipulates that theprovisions in the General Annex must be imple-mented in national legislation in the simplest possi-ble form and that customs administrations shouldcooperate with the trade community.9

Chapter 2: Definitions. This chapter provides thedefinition of terms related to the different level ofobligations and the structure of the Convention.

Chapter 3: Clearance of Goods. This chapter artic-ulates various provisions aimed at simplifying clear-ance procedures.10 It prescribes the obligation ofcustoms to establish customs offices and designatebusiness hours; the qualification of declarants, theirrights, and their duties; the creation of simplifiedinformation requirements for goods declarationsand other documents; and the establishment ofexpeditious procedures for examination, assess-ment, and collection of duties and taxes, and releaseof goods. It stipulates coordinated intervention withother government agencies and customs agencies11

and establishes procedures to be applied in cases ofinadvertent errors and minor offenses.12

Chapter 4: Duties and Taxes. This chapter out-lines provisions aimed at achieving transparency,predictability, and simplification of customs’ rev-enue collection procedures that require nationallegislation to specify conditions, timing, and meth-ods of duty and tax payment.13 It provides fordeferred payment and repayment.14

Chapter 5: Security. This chapter contains thebasic principles necessary to achieve transparency,predictability, and simplicity of customs practicespertaining to security (that is, pledges, guarantees,and the like to secure correct payment of duties).National legislation must enumerate the cases inwhich security is required and must specify theforms of security and the amount of security.15 Italso advocates that the amount of security must beas low as possible and must not exceed the amountthat is potentially chargeable for payment of dutiesand taxes. In addition, it recommends that securityshould be discharged as soon as possible.16

Chapter 6: Customs Control. This chapter firststates that all goods entering or leaving customsterritory are under customs’ control.17 It then out-lines recommended customs procedures toenhance customs control, based on modern tech-niques and technologies such as the use of riskanalysis and risk management, audit-based control,cooperation with other customs administrationsand the trade community, IT, and e-commerce.18

Facilitation of international trade is one of themost important objectives of the Convention, andmodern customs procedures are the key to achiev-ing this goal. Risk management, for example, expe-dites the clearance of legitimate shipments whilemaintaining appropriate border control by identi-fying high-risk cargo. It entails a shift from100 percent examination of documents and con-signments to selective inspections. Such a programwill enable a customs administration to optimizethe use of its resources and allow the establishmentof a fast-track program in which approved traderswith good compliance records (as “authorized

Legal Framework for Customs Operations and Enforcement Issues 55

9. Standards 1.2–3.

10. For example, Standard 3.12 states that informationrequired on goods declarations must be limited to data neces-sary for assessment of duties and taxes, compilation of statis-tics, and application of customs law, and Standard 3.38 limitssamples drawn for examination purposes to the smallest possi-ble quantity.

11. Transitional Standard 3.4 outlines joint operations at com-mon borders by neighboring customs administrations, andTransitional Standard 3.5 advocates coordinated inspections ofgoods with other government agencies.

12. Standard 3.39 stipulates that customs must not impose sub-stantial penalties for inadvertent errors and errors without evi-dence of fraud or gross negligence.

13. Standards 4.1–3, 5–11, 13.

14. Standards 4.15–24.

15. Standards 5.1–2.

16. Standards 5.6–7.

17. Standard 6.1.

18. Standards 6.3–8 and Transitional Standard 6.9.

persons”)19 can obtain the release of cargo withminimum customs intervention. Likewise, theintroduction of audit-based control complementsrisk management and is an essential element of theeffective implementation of the WTO ValuationAgreement (WTO 1994c and 1994d). Other cus-toms administrations and the trade communityare indispensable partners for an effective risk-management program because they can be con-sulted about latest trade practices.

Chapter 7: Use of Information Technology. Appli-cation of IT is another important requirement ofthe General Annex to simplify and harmonize cus-toms procedures and facilitate trade. This chapterobligates customs administrations to apply IT tosupport operations where it is cost-effective and effi-cient for customs and for the trade community.20

The chapter mandates new or revised national legis-lation to provide for electronic alternatives to paper-based documentation requirements, electronic aswell as paper-based authentication methods, and theright of customs administrations to retain informa-tion and, as appropriate, share it with other customsadministrations through electronic means.21 It alsostates that customs administrations must developinformation technology in consultation with all rel-evant parties.22 The Guidelines for this chapter pro-vides some information that might help customsdetermine how to improve the services it provides toits clients and trading partners through the use ofinformation and communication technologies.

Chapter 8: Relationship Between Customs andThird Parties. This chapter provides for third par-ties, and states that persons or entities will have theoption of doing business with customs directly orthrough a third party.23 Third parties will have thesame rights as parties on whose behalf they act.24

Chapter 9: Customs Information, Decisions, andRulings. This chapter lists key principles for cus-toms to achieve transparency and predictability of

their procedures and practices, through the publi-cation of laws, regulations, judicial decisions, andadministrative rulings. Implementation of the stan-dards outlined in this chapter is critical for meetingthe requirements of Article X of GATT 1994.25 Forexample, it stipulates that information pertainingto customs law must be readily available and thatany changes must be made available well in advanceof the changes entering into force.26 Customsadministrations must provide “as quickly andas accurately as possible” specific informationrequested by an interested party as well as anyinformation they consider pertinent to the partywithout sacrificing confidentiality.27 Adverse cus-toms decisions must provide reasons and mustadvise of the right of appeal. Furthermore, customsadministrations must issue binding rulings uponrequest.28

The guidelines to this chapter provide detailedinformation for administrations to set up their pro-cedures for publication of information. Theyinclude quality and clarity of information, tradeconsultation, exhibitions, enquiry offices, availabil-ity of tariff information, liability of informationprovided, explanation of the concept of freedom ofinformation, procedures for issue, and notificationand annulment of binding rulings by customs.

Chapter 10: Appeals in Customs Matters. Theright of appeal also ensures transparency and pre-dictability of customs procedures and practices. Itprotects individuals against decisions of customsthat may not be in compliance with national lawsand regulations. It also safeguards against omis-sions by customs. Furthermore, the reviews of chal-lenged decisions or omissions and subsequent ver-dicts by a competent authority guarantee uniformapplication of the laws and regulations. The provi-sions in chapter 10 provide for a multistage appealprocess and an independent judicial review as afinal avenue of appeal. Specifically, chapter 10requires national legislation to provide for a right

56 Customs Modernization Handbook

19. “Authorized persons who meet criteria specified by the Cus-toms, including having an appropriate record of compliancewith Customs requirements and a satisfactory system for man-aging their commercial records.” (Transitional Standard 3.32).

20. Standard 7.1.

21. Standard 7.4.

22. Standard 7.3.

23. Standard 8.1.

24. Standard 8.4.

25. Article X of GATT 1994, Publication and Administration ofTrade Regulations, requires publication before enforcement ofall laws, regulations, judicial decisions, and administrative rul-ings affecting imports and exports as well as measures thatimpose a new or more burdensome requirement, restriction, orprohibition on imports, or on the transfer of payments.

26. Standards 9.1–2.

27. Standards 9.4–6.

28. Standards 9.8–9.

of appeal in customs matters and gives anyoneaffected by a customs decision such a right.29 Aninitial appeal will be made to the customs, and theappellant has a right to further appeal to an inde-pendent authority and finally to a judicial author-ity.30 Compliance with the Standards in chapter 10is an essential step toward meeting the require-ments of Article X of GATT 1994.31

Specific Annexes There are 10 Specific Annexescovering individual customs procedures and prac-tices. Acceptance of the Specific Annexes is notobligatory for accession to the Convention. How-ever, the WCO recommends that contracting partiesat least accept the Specific Annexes on importationfor 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

and processing.36 Reservations are permitted in Rec-ommended Practices in the Specific Annexes, butcontracting parties must review their reservationsevery three years.

Guidelines One of the outstanding features ofthe Convention is the existence of comprehensiveimplementation guidelines that have been devel-oped to provide, in the General Annex and SpecificAnnexes of the Convention, detailed explanationsof all chapters, except for the chapter on Defini-tions. These guidelines are not part of the legal textof the Convention, but are rather designed to offerexplanations of the provisions of the Convention,and to provide examples of best practices or meth-ods of application and future developments. Theymust be read in conjunction with the legal text con-tained in each chapter of the annexes. The guide-lines are constantly updated to provide informationon new and modern practices.37

Preparing a Modern Customs Code

The Revised Kyoto Convention can serve as a guid-ing principle for preparing a modern CustomsCode. While countries can sign on to the Conven-tion as a means to modernize a Customs Code, it is,in fact, not the only way to implement a modernone. Another option would be a phased introduc-tion of the principles and practices contained in theConvention, taking into account the local environ-ment and capacity.

Obligations Under the Revised Kyoto Convention

Contracting parties are obligated to bring intoforce, nationally, the standards, transitional stan-dards, and recommended practices that they haveaccepted. Standards must be implemented within36 months of ratification, while transitional stan-dards have a 60-month implementation period.Such regulations are not necessarily restricted tocustoms legislation and may apply to official notifi-cations, charters, or ministerial decrees, or similarinstruments. Customs administrations are obligedto ensure that their regulations are transparent,predictable, consistent, and reliable.

Contracting parties’ national legislation mustinclude at least the basic rules from the GeneralAnnex, with detailed regulations for their imple-mentation; no reservations are permitted. In

Legal Framework for Customs Operations and Enforcement Issues 57

29. Standards 10.1–2.

30. Standards 10.4–6.

31. Article X of GATT 1994, Publication and Administration ofTrade Regulations, also requires appeal procedures. Membersmust “maintain or institute judicial, arbitral or administrativetribunals or procedures for the purpose, inter alia, of the promptreview and correction of administrative action relating to Cus-toms matters” providing for uniform, impartial, and reasonableadministration of laws, decisions, and rulings affecting importand export.

32. Annex B: The minimum specific requirements for the clear-ance of goods for home use (chapter 1), the requirements for theclearance of goods for home use that were exported and arebeing re-imported in the same state (chapter 2), and the circum-stances and conditions in which relief from import duties andtaxes may be granted for certain goods declared for home use(chapter 3).

33. Annex C deals with outright exportation as opposed to tem-porary exportation.

34. Annex D: Customs procedures for warehousing (chapter 1)and in free zones (chapter 2). These procedures facilitate tradeby waiving or deferring payments of duties and taxes.

35. Annex E outlines customs procedures and practices relatedto goods traveling through multiple customs offices within asingle customs territory (national transit) or multiple customsterritories (international transit). These provisions on interna-tional transit provide for technical and operational means tomeet requirements set out in GATT Article V.

36. Annex F describes customs procedures and practices that acountry might use to promote its economy and trade by provid-ing total or partial relief of duties and taxes.

37. For example, the guidelines for chapter 7 were revised inMarch 2003 to take account of developments in the area ofinformation and communication technology since 1999.

addition, contracting parties may accept all or anumber of Specific Annexes and chapters uponaccession to the Convention. The WCO considers itdesirable for contracting parties to accept the Spe-cific Annexes on importation, exportation, ware-houses, transit, and processing. Although theguidelines are not legally binding, customs admin-istrations may adopt and implement those bestpractices that are most suited to their particularenvironment.

In addition to legislative measures, contractingparties must provide facilities, personnel, andequipment to realize the objectives of the Conven-tion. Such infrastructure is indispensable particu-larly in the areas of IT, risk management, and audit-based controls.

Practical Guide to the Modernizationof Customs Codes

A customs administration might take the followingsteps to prepare for the implementation of theConvention into its legislation. It could organize aworking group, consisting of headquarters andfield officials, under the presidency of a high rank-ing official. Typically, some headquarters specialists(including IT) would be involved in major policymatters (such as procedures, investigations) ortechnical matters (such as valuation and origin, aswell as legal matters). This group would meet at thevery early stages of reform planning, and eachmember would be expected to provide a list of whathe or she would like to see in the laws as the out-come of new legislation, what the current legisla-tion does not allow, and how he or she would like tosee customs evolve. At the same time, someonefrom the legal department’s staff would review theexisting laws that affect customs work. It would beessential to identify, as far upstream as possible, allthe legislation relating to other relevant govern-ment agencies, including those dealing withoffenses that might affect customs operations, andto determine whether the legislation would requireadjustments to the relevant articles, cross-referenc-ing in the customs law, or repealing. It would alsobe important to know if the customs law super-sedes other previous legislation.

The customs administration also could do thefollowing:

• Obtain support from appropriate quarters (theexecutive and legislative branches, various

groups within the customs administration,members of the trade community, WCO, thedonor community, and so on). Consultationswith the trade community at this stage are par-ticularly important.

• Check whether proper legal authority, such asthe authority to make administrative regulationsand the ability to provide technical input to thelegislative branch, is accorded to the customsadministration for the purpose of issuing a newcode. Some customs administrations may needto obtain additional or new legal authority toeffectively and efficiently implement the Con-vention.

• Use the provisions of the Convention or othernational legislation aligned to the Convention,such as the EU Code as a checklist (for an exam-ple, see box 3.2). It should compare the currentcustoms laws to the provisions in the GeneralAnnex and Specific Annexes and identify provi-sions that must be added, repealed, replaced, ormodified. During this stage, it should study thenational legislation of other countries and con-sult with other customs agencies to learn fromthem.

• Identify provisions that must be enacted asstatutes by the national legislature.

• Identify provisions that are better suited for cus-toms regulations, administrative guidelines,official notices, and so forth.

• Identify obstacles to successful implementationof a modern code through legislation.

• Determine how each provision should be imple-mented. It must be recognized that each provi-sion can be implemented in a variety of ways. Aneffort should be made to choose a method ofimplementation that will suit the environmentin which a particular customs authority oper-ates. Morocco’s revision of its Customs Code,in line with the Revised Kyoto Convention,presents a good example of this practice (seebox 3.3).

Potential Obstacles to CustomsModernization

Customs modernization efforts sometimes faildespite the good intentions and hard work of cus-toms administrations. Certainly, the customs com-munity and the international donor community

58 Customs Modernization Handbook

have learned the lesson that “one-size-fits-all”solutions do not work. Successful modernization ofcustoms legislation requires attention to the uniquepolitical and legal tradition, social and cultural cli-mate, and administrative or organizational struc-ture in which a particular customs administrationoperates.

Legal Tradition

Legal research by Victor Thuronyi (1996) has iden-tified integration as one of four essential criteriafor well-drafted legislation. Thuronyi defines inte-gration as “the consistency of the law with the legalsystem and drafting style of the country” (p. 72).Indeed, when drafting new legislation, the draftermust be mindful of the legal tradition of the coun-try. At the most general level, legal systems are clas-sified in two broad groups: civil law and commonlaw. Civil law is based on written legal codesarrived at through legislation, edicts, and so forth,whereas common law is based on the precedents

created by judicial decisions over time. Under thecivil law system, legislation tends to be drafted inthe form of broad statements of principles whereascommon law legislation tends to be much moredetailed. However, these sweeping characteriza-tions are generally of limited use. To draft new,successful customs laws that are amenable to theunique legal tradition of a country, the draftermust look more closely at the country’s traditionaldrafting style, organization of laws (for example, asingle code vs. separate laws), practices of adminis-trative and judicial interpretation, and choice oflegal instruments.

Drafting Styles

Thuronyi insists that a country’s laws must be “con-sistent in appearance and style in order to facilitateunderstanding and interpretation of the laws andto maintain the dignity of the legislative process”(Thuronyi 1996, p. 89). At the same time, whendrafting new customs legislation the drafter should

Legal Framework for Customs Operations and Enforcement Issues 59

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

Under the Revised Kyoto Convention it is possi-ble to have in place a sample checklist that iden-tifies provisions requiring amendment or newlegislation. The following two provisions providea good example for a sample checklist:

3.34 Standard. “When scheduling examina-tions, priority shall be given to the examinationof live animals and perishable goods and toother goods that Customs accept are urgentlyrequired.”

This provision requires that customs mustexamine urgent required goods without delay toavoid loss or deterioration of the goods. To fulfillthis requirement, customs should, subject to theavailability of resources, examine perishablegoods, live animals, or goods that are urgentlyrequired, outside their normal hours of businessor at a place other than the customs officewhere the goods declaration was lodged. In thisregard, the national statutes and regulationsthat deal with the subject matter of the standardshould be listed. It would also be important towrite down whether the existing statute or regu-lation must be modified or replaced or whethernew legislation is necessary. Useful resources,

other government departments to be consulted,and any other concerns should also be listed.

3.35 Transitional Standard. “If the goodsmust be inspected by other competent authori-ties and the Customs also schedules an examina-tion, the Customs shall ensure that the inspec-tions are coordinated and, if possible, carriedout at the same time.”

While the ideal situation is a single examina-tion coordinated and conducted by the authori-ties concerned at the same time, this provisiondoes not require customs to take special actionsto ensure this situation. It requires that customsestablish effective communications with othercompetent authorities and where possible tocarry out their examination at the same time asthe other authorities. However, in the interest ofcost-effectiveness and efficiency to both govern-ments and the trade, customs may give consid-eration to re-engineering its clearance process,which could result in the establishment of aninspection service or compliance verificationprocess that is integrated with that of the othercompetent authorities.

Source: WCO 2000.

conscientiously consider the advantages and disad-vantages of the country’s traditional drafting style,for possible improvement. For example, statutes inthe English-speaking world have a reputation forbeing excessively complex and difficult to under-stand. This is partly because drafters in these coun-tries have inherited the traditional style of legisla-tive language used in the United Kingdom in the19th century (Turnbull 1993). However, the com-plexity of the legislative language was also a resultof a strong need for precision. Turnbull believesthat precision can be accomplished without undulysacrificing simplicity and clarity. Simple clarity andprecision are both extremely important for a coun-try’s customs legislation to achieve transparencyand predictability. A customs law must be simpleand clear so that nonlegislators and nonlawyers,

such as frontline customs officials and traders, canunderstand it. Simultaneously, customs law shouldbe precise to minimize opportunities for excessiveadministrative and judicial discretion.

Organization

A single consolidated Customs Code—a documentcontaining all the customs laws—has many advan-tages over customs laws spread over many docu-ments. For example, such a code promotes compli-ance because it is easier for a trader to findapplicable laws and regulations in a single codethan in multiple documents (Thuronyi 1996). Italso helps to maintain consistency within the cus-toms laws because legislators are more likely towork under a common guiding principle within a

60 Customs Modernization Handbook

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

Morocco revised its customs law in 1997 andhas become one of the first countries to adoptthe Revised Kyoto Convention. The MoroccanCustoms Administration attributes its successesto (a) its efforts to analyze and understand itsoperating environment, to form partnershipswith the trade community, and to cooperateand consult with other government agencies;(b) a pragmatic approach aimed not only atdeveloping a new law, but also at avoiding pit-falls common in any procedural improvement;and (c) involvement of all customs staff mem-bers. Its efforts raised awareness among the staffthat the legislation’s ultimate goal was toimprove its procedures to fulfill its missions,including economic development.

The Moroccan Customs Administrationaimed to adapt its legislation to national andinternational environments. The latest review ofcustoms legislation was no exception. Theadministration consulted all relevant ministerialdepartments and private sector representatives.As a result, the Moroccan customs legislation isin harmony with all other national legislation.For example, customs penal provisions are con-sistent with the national penal code and includea number of common principles such as theprinciples of good faith, extenuating circum-stances, and supervisory authorities of adminis-trative officers.

The Moroccan Customs took leadership inimplementing the Revised Kyoto Convention,and encouraged other government depart-

ments to review their border procedures. TheMoroccan Customs began the process by firstimplementing essential provisions within theCustoms Code and then proceeding to supple-ment them with explanations and clarificationsin the form of administrative instructions suchas circulars and notes. The Moroccan customslaw provides for close cooperation with otherrelevant government agencies. This is particu-larly vital in health and agricultural controls andenforcement and information exchangesamong law enforcement organizations. Thecustoms law defines the principle of coopera-tion whereas regulations specify terms and con-ditions for such cooperation.

For some years the Moroccan Customs hasbeen pursuing a decentralization policy, givingregional authorities the power to make certaindecisions without consulting headquarters. Astrong communication network was built to givefrontline officers all the instruments, includingauthorizations, and instructions necessary todeal with a wide range of customs matters. Onlywhen cases of major importance arise, wheninterpretation of legislative texts is required, orwhen arbitration is requested, is the centraladministration consulted. When a case requireslegislative interpretation, customs prepares ageneral note to ensure consistent application ofthe law nationwide.

Source: Steenlandt and De Wulf 2004.

single code. A code is also easier to amend thanmultiple laws because “amendments are automati-cally consolidated into” the code itself (Renton1975, pp. 76–84). This is desirable because it is hardto determine precisely what the law is if amend-ments do not repeal or replace previous laws clearly(Thuronyi 1996).

However, a truly consolidated Customs Code isperhaps a rarity. Many countries organize lawsrelated to customs into two major legal documents:one dealing with the tariffs, duties, and taxes, andanother concerning customs procedures.38 Manycustoms-related laws and regulations are alsofound in the laws enacted to promulgate interna-tional treaties and agreements.39 Moreover, it isalmost inevitable for provisions relevant to the cus-toms administration to be contained in separatelaws, because in practice customs has authority toenforce legislation other than revenue laws (seeEnforcement of Customs Laws in this chapter).Furthermore, because many of the legal provisionsrelevant to customs are procedural they are almostinevitably included, at least in part, in the generalrules for criminal or administrative procedure,rather than in a Customs Code. Thus, even if a Cus-toms Code is organized to include customs-relatedprovisions on as comprehensive a basis as feasible,there will inevitably be a need for coordinationwith provisions that are found outside this code.Separate laws can be organized in an effective man-ner by cross-referencing and eliminating duplicateprovisions (Thuronyi 1996). Particular attentionmust be paid when provisions related to a singlecustoms duty or procedure are included in morethan one piece of legislation or placed within non-customs law, because such provisions are difficultto comply with, enforce, and amend.

Administrative and Judicial Interpretation

It is generally agreed that statutes under commonlaw tradition are detailed and that the courts inter-

pret them narrowly. In contrast, statutes in civil lawcountries are broad, outlining general principlesonly and leaving details for other mechanisms,including the courts, to fill in. Such generalizationsare of limited use because, in reality, some civil lawcountries have statutes that are as detailed as thosein common law countries (Turnbull 1993). How-ever, it is prudent to understand how officials andjudges traditionally apply customs laws in a givencountry and to attempt to draft new customs legis-lation accordingly. The drafter should learn howcustoms officials and judges interpret a provision ofthe customs law, whether a legislative or adminis-trative guideline is available, whether precedentsare relied upon, and whether officials and judgesenjoy a certain degree of discretionary power.However, the drafter should be cognizant of weak-nesses of the traditional approach. Customs offi-cials should not be allowed excessive discretion ininterpreting customs laws because transparencyand predictability of the customs procedures can-not be achieved under such circumstances. Cus-toms laws also require some degree of flexibility.Excessively rigid applications of customs lawswould result in unnecessary steps in customs pro-cedures, particularly in relation to minor violationsor disputes, and would burden traders, customs,and judicial systems.

Choice of Legal Instruments

A wide variety of legal instruments are available forWCO member countries to implement modern cus-toms principles. A government can enact customslegislation as statute, administrative guidance, offi-cial notification, charter, ministerial decree, sched-ule, and so on. For example, Moroccan customs lawsare organized in two documents. The first documentis the Code on Customs and Indirect Taxation, com-posed of decrees and decisions by the Minister ofFinance. The second document is the Customs andIndirect Taxation Regulation that explains customslegislation and regulations and contains all the Notesand Circulars.

Selecting an appropriate legal instrument tomatch the purpose of a given provision is impor-tant. Thuronyi (1996, p. 86) states that it is not“appropriate to try to provide all the necessarydetails” in a statute because (a) it would make thestatute “unduly lengthy and difficult to understand,”

Legal Framework for Customs Operations and Enforcement Issues 61

38. For example, the EU has the Common Customs Code andImplementation Regulations dealing with Customs proceduresand the European Union Tariff Code. Each member country hasits own laws on customs enforcement, penalties, and appealsprocesses.

39. Japan, EU, and others, for example. When a provision of aconvention or other international agreement cannot be imple-mented within the Common Customs Code, the EU makes anentry into the code referring to the provision.

(b) the legislature “cannot foresee all situations,”and (c) statutes are more difficult to modify thanother legal instruments. Furthermore, customsagencies are often a more suitable entity to makedetailed rules because they have information andexpertise, they are less vulnerable to political andother outside pressures, and they can react morequickly to new problems (Stein, Mitchell, andMezines 2003). Some advocate that details shouldnot be crystallized in the form of statutes becausethe resulting rigidity is potentially harmful to thepractices of fair and speedy agencies (Jackson1941).

In general, essential provisions must be enacted aslaws while details that require frequent amending arebetter suited for administrative regulations. How-ever, it should be noted that such determinationslargely depend on “the practice in the particularcountry and on politics” (Thuronyi 1996,pp. 86–87). For example, Thuronyi states that howmuch power over detail the legislature is willing todelegate to an administrative agency often dictatesthe choice of legal instruments. Time is also one ofthe most obvious determinants for whether a givendetail is included in a statute because the total timeavailable to the legislature for lawmaking is limited(Jackson 1941, p. 14). Finally, Thuronyi points outthat leaving details on which consensus is hard toreach to administrative regulations is a political tac-tic employed to ease passage of a bill.

Determination of Which Principles to Implementand How to Implement Them

A customs administration must decide carefullywhich reform principles to implement. A modernreform principle can be implemented in a variety ofways; however, not all options suit the operatingenvironment of the particular customs administra-tion. For example, trade facilitation through apaperless customs procedure may be promoted byan incentive to use e-documents or by a mandateaccompanied by a sanction. The choice betweenthese two options should be based on carefulconsideration of the e-commerce environment inwhich a particular customs administration findsitself. A high level of compliance may be achievedby a system of penalties for customs violation aloneor in conjunction with more subtle incentive meas-ures such as the granting, denial, or withdrawal of

expedited clearance privileges. Before decidingwhich measure to implement, however, the capaci-ties of the customs organization, including its com-mercial integrity and efficiency, must be examinedcarefully (Raven 2001).

Interaction with Other Government Entities

Customs often enforces a wide range of lawsbesides customs law. For example, the United StatesCustoms and Border Protection enforces numerouslaws and international treaties and agreementsin diverse fields from agriculture to nationaldefense.40 Customs also routinely cooperates withother government agencies, sometimes sharingfacilities at national borders. Therefore, successfulcustoms legislation must provide for the interde-pendence of multiple government entities. Consul-tations between customs and other departmentsare vitally important to eliminate duplicate andinconsistent legislation. To achieve simplification ofcustoms and other border procedures, it is desir-able for customs to enforce laws on border proce-dures or for customs to cooperate closely withother concerned departments and agencies.41 Oth-erwise, border controls by multiple governmentorganizations are likely to result in ineffective andinefficient border procedures and corruption.Customs in some market transition economies inwhich borders had been managed by military forcewith little external trade have experienced such dif-ficulties. Cooperation is particularly importantwhen laws are being made on border procedures inwhich customs generally lacks expertise, such asagricultural or health inspections. On such occa-sions, customs might get involved to ensure simple,coordinated border inspections.

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40. According to its Web site, the United States Customs andBorder Protection enforces laws on agriculture, alien and natu-ralization, banks and banking, census, commerce and trade,conservation, copyrights, crimes and criminal procedures, cus-toms duties, food and drugs, foreign relations, internal revenue,intoxicating liquors, money and finance, navigation, patents,postal service, public building and property, public land, rail-roads, shipping, telegraphs and telephones, territories and insu-lar possessions, transportation, war and national defense, andinternational treaties, statutes, and agreements (United StatesCustoms and Border Protection 2003).

41. Raven (2001) states that it has been generally accepted thatconvergence of frontier controls in a single administrativeagency, usually customs, is highly beneficial.

Translation

When drawing on a model code, the drafter mustbe careful of the hazards of translation. Frequently,a legal concept does not accurately translate fromone language or legal system to another. The targetculture might not have an equivalent legal concept.For example, not all languages have an equivalentword for “audit.” The drafting team should takecare to understand what a particular concept re-presents in the original language and provide adescription, definition, or explanation to preventmisunderstandings.

Enforcement of Customs Laws

Every customs administration has enforcementduties. However, the scope of the responsibilityand authority differs widely from one administra-tion to another. Some customs agencies have vastpowers to enforce customs laws and regulations. Insome countries, customs derives enforcementpowers from its penal codes, and these powers arenot confined to matters related to customs law. Atthe other end of the spectrum, some customsagencies play more limited roles. They enforce thecustoms law related only to revenue collection by“the inspection of goods and the classification andvaluation of merchandise” (Lane 1998, p. 78).Because of the increasing need to fight customsfraud (intellectual property rights violations, rev-enue fraud, and transshipment, for example), nar-cotics trafficking, money laundering, and exportviolation (trafficking in weapons and munitions,among others), those customs agencies with lim-ited powers might require a greater range ofenforcement authority.

The WCO’s Expert Working Group on commer-cial fraud recommends the following set of enforce-ment powers (WCO 2004a):

• examination (compliance with the customs law)• right of search (illegal importation and exporta-

tion)• sampling• seizure• right to access documents• post-import and post-export audit• detention or arrest• charge• prosecution

• restraint of assets• exchange of information• inquiries on behalf of other customs adminis-

trations.

Proponents for greater enforcement authority andresponsibility for customs offer two reasons: (a)efficiency and effectiveness and (b) morale of cus-toms officers. First, customs is uniquely situated toenforce customs and other laws in border regionsbecause it has the infrastructure to examine goodsand people that move across the borders. It also hasfamiliarity with cross-border activities. Risk man-agement tools, information technology, and coop-eration with other government agencies and othercustoms administrations would enhance customs’abilities to enforce customs and other laws at theborders because these tools would enable the agen-cies to assess threats and deal proactively with pos-sible violations. Therefore, it is efficient and effec-tive to assign appropriate authority to customsagencies to enforce customs and other laws relatedto cross-border violations.

Second, the advocates of a substantial enforce-ment role for customs also claim that customs offi-cers should be given the authority to search, detain,arrest, seize, and investigate people, goods, andmeans of transportation as related to actual or sus-pected customs violations because limiting cus-toms’ enforcement powers to revenue collectionwould demoralize customs officers (Zarnowiecki2003). They believe the practice of handing over theinvestigation to another government agency suchas the police would discourage customs officersfrom discovering violations at the borders in thefirst place because this would, in many cases, resultin a loss of incentives, such as additional salary ben-efits and social recognition, for customs officers.They fear that such demoralization would decreasecustoms’ effectiveness and weaken customs’integrity.

The Revised Kyoto Convention deals withenforcement issues specifically in Annex H, whichsets out standards and recommended practices toensure fairness, speed, consistency, transparency,and predictability of enforcement of customslaws while aiming for minimal disruption totrade and travel. The annex deals with the defini-tion and investigation of breaches of the customslaw and with customs’ role in the administrative

Legal Framework for Customs Operations and Enforcement Issues 63

settlement of offenses. This annex, however, doesnot cover all the activities that customs usuallyengages in when dealing with customs and othercross-border offenses because many of those activi-ties are beyond customs laws and regulations.Investigation and administrative settlement, how-ever, are two topics in this area that must be coveredspecifically in the customs legislation. The Conven-tion does not limit the powers granted to customsunder individual national legislation. Instead, itacknowledges diversity in the scope of customsenforcement powers among its member nations.

Specifically, which enforcement powers to grantto customs officers must be determined in lightof the country’s constitution, legal system, andinstitutions. Yet, regardless of the number ofenforcement authorities and their scope of respon-sibilities, it is important for each customs adminis-tration to use risk management tools, informationtechnology, and cooperation with other govern-ment agencies and other customs administrationsto achieve fair, speedy, and consistent customsenforcement in accordance with the principles ofthe Convention. The WCO offers information andtraining in customs enforcement and is a goodsource of information on enforcement moderniza-tion and reforms.42

Model Legislation for InternationalProperty Rights

The Revised Kyoto Convention is the most compre-hensive international instrument designed to har-monize and simplify customs procedures and prac-tices. However, there are other instruments devisedto support the Convention. The WCO is continu-ally developing new tools and initiatives to respondto changes surrounding customs operations. Suchtools and initiatives are designed to be compatiblewith and complementary to the Convention.

It is necessary for customs laws and institutionsto keep pace with the government’s internationalcommitments. One such example is the enforce-ment of intellectual property rights, required by theAgreement on Trade-Related Aspects of IntellectualProperty Rights (TRIPS Agreement) (WTO1994b).43 The WCO Intellectual Property Rights

(IPR) Model Legislation is being developed to helpmember administrations enact border measuresdesigned to protect intellectual property rights,without interfering with legitimate trade (WCO2004b).44 This model legislation is intended to pro-vide guidance to those customs administrationsthat are implementing intellectual property rightslegislation for the first time and to those conduct-ing legislative reviews or reforms. It will help cus-toms meet the standards set in the TRIPS Agree-ment. However, the IPR Model Legislation is notbinding upon members and goes beyond the mini-mum standards required in the TRIPS Agreement.The WCO first developed the IPR Model Legisla-tion in 1988. Since then the model legislation hasundergone two revisions, and the WCO aims tokeep it up-to-date through regular revisions, incor-porating best practice and keeping in line with thesuggestions of the World Intellectual PropertyOrganization. Box 3.4 describes the process ofmodernizing the Russian Federation customslegislation.

Operational Conclusions

Several key operational implications derived fromthis chapter stand out.

• Customs’ efforts to modernize legislation shouldstrive to achieve international legal standards.The Revised Kyoto Convention embodies bestpractices of national legislation around theworld. In particular, it enables each country tomeet international commitments concerningtrade and border procedures, including theagreed on rules of the WTO. It also enables eachcountry to tailor its policies and procedures tomeet its legal, political, cultural, and societalrequirements.

• Implementing a Customs Code aligned with theprinciples of the Revised Kyoto Conventionwould allow for sufficient transparency and pre-dictability based on providing basic informationon matters such as rules, decisions, consultationmechanisms, and adequate appeals processes. Itwould eliminate complex or redundant customsformalities that delay clearance and create

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42. World Customs Organization, www.wcoomd.org.

43. Articles of TRIPS relevant to customs are 51–60 in Section 4Special Requirements Related to Border Measures.

44. The latest text is available on the WCO IPR-related Web sitehttp://www.wcoipr.org.

opportunities for unnecessary discretionaryinterventions. Also, the legislation would providefor selective verification of cargo based on riskmanagement. It would allow for advance lodg-ment of information or goods declarations andpost-clearance audits. It would also ensure thelegal framework for automation, including thatof electronic communication; avoid ambiguousprovisions that give customs officers excessive

discretionary powers; and grant adequateauthority for the customs administration toachieve its enforcement and compliance goals.

• Governments need to have in place a develop-ment strategy that provides a clear view of thecustoms administration’s role, particularly tak-ing into account how it will address these needswhile achieving and maintaining internationalstandards in its customs legislation.

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 itselfto unifying its customs legislation and imple-menting the rules accepted worldwide. In 2003a new Customs Code was adopted; it enteredinto force on January 1, 2004. The new law isbased on the Revised Kyoto Convention, as wellas on customs legislation of Russia’s key tradingpartners.

In the new Customs Code, account has beentaken of the WTO requirements stipulated inArticle I “General Most-Favored-Nation Treat-ment,” Article V “Freedom of Transit,” Article VII“Valuation for Customs Purposes,” Article VIII“Fees and Formalities connected with Importa-tion and Exportation,” Article X “Publication andAdministration of Trade Regulations” of theGATT, TRIPS, the Agreement on Rules of Origin,and the Agreement on Implementation ofArticle VII.

The new Customs Code aims to eliminateexcessive administrative restrictions on foreigntrade, establish clear and consistent rules foreconomic operators with regard to transbordermovement of goods, as well as reduce theadministrative discretion of customs officials andthe inordinate number of bylaws and adminis-trative instructions, which had had a negativeimpact on the clarity and transparency of cus-toms operations. The final draft of the code wasprepared in close cooperation with the businesscommunity. A review of an initial draft of thenew code was initiated by the Russian Union ofEntrepreneurs. A working group consisting ofrepresentatives from the business community,the State Customs Committee, the Ministry ofFinance, and the Ministry of Economy devel-oped joint proposals for amendments to thefinal reading of the draft code in the Duma. Thisprocess made it possible for the different groupsto compromise on many issues. The state hastaken significant innovative measures to meetthe needs of traders, as well as those of ordinarycitizens, crossing the border.

The legal and enforcement powers of customsare clearly spelled out while the conditions tospeed up the customs procedures (pre-entry dec-laration, specific simplified procedures, use of asingle classification code, and so forth) have beenclarified. The new code envisages a broad applica-tion of IT, electronic customs control, and cus-toms clearance. The process of streamlining andsimplifying customs formalities was conditionedby the shift from full physical examination of allgoods to a system of selective inspections basedon risk assessment and risk analysis. This shift isexpected to facilitate international trade and pro-vide reliable customs control while ensuring effi-cient handling of customs resources. Implemen-tation of the code is expected to change therelationship between customs and the businesscommunity, which will increasingly be based onthe principle of cooperation and consultation.This approach is consistent with the new conceptof governing the state, that is, a dialogue betweenthe government and the business community,and reflects the approach recommended by theWCO. The approach permits the exercise of pub-lic control while taking into account the needs ofthe business community and ensuring opennessand transparency of the legislation.

While this legislation is a considerable step inthe right direction, the code still contains ambi-guities that could lead to substantial discretionin customs operations. How it will actually beimplemented needs to be observed carefully byboth the customs administration and the tradecommunity. Based on the experience of imple-menting a new Customs Code, there might arisea need to adjust or improve the Customs Codeitself or the way it is implemented. It is thereforecritical to maintain consultations between thecustoms administration and the trade commu-nity to follow the implementation proceduresrecommended by the Customs Code.

Source: Based on contributions from LeonidLozbenko, First Deputy Chairman, State CustomsCommittee of the Russian Federation 2003.

• As a practical way to modernize the CustomsCode, it is critical for a customs administrationto maintain consultations with the trade com-munity.

• The provisions of the Revised Kyoto Conventioncan be used as a checklist to make a point-by-point comparison between best practices andwhat exists in the current code. It is also highlyrecommended that the national legislation ofother countries be studied and that other cus-toms agencies be consulted to learn from theirexperience. Once the gaps in the current codeare identified, the remedies to the problem—based on international standards and tailored tocountry-specific needs—should be proposed asnew legislation.

• To be functional and effective, the proposed leg-islation must fit into the local culture and thenational legislative framework, and should besupported by sufficient judicial capacity.

• Modern customs legislation should strive to putin place a comprehensive body of customs-related laws that establish the clear competenceand enforcement powers of customs.

Further Reading

Lane, Michael. 1998. Customs Modernization and the Interna-tional Trade Superhighway. Westport, Conn.: QuorumBooks.

Thuronyi, Victor. 1996. “Drafting Tax Legislation.” In VictorThuronyi, ed. Tax Law Design and Drafting. Washington,D.C.: International Monetary Fund.

World Customs Organization. 1997. Text of the Revised KyotoConvention. Brussels. www.wcoomd.org/ie/En/Topics_Issues/FacilitationCustomsProcedures/Kyoto_New/Content/content.html.

References

De Wulf, Luc, and José B. Sokol, eds. Custom ModernizationInitiatives: Case Studies. Washington, D. C.: World Bank.

European Union. 1992. Council Regulation (EEC) No 2913/92of 12 October 1992 establishing the Community CustomsCode. Brussels. europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=31992R2913&model=guicheti.

Jackson, Justice Robert H. 1941. Attorney General’s Report on theAdministrative Procedure Act. Washington, D.C.: UnitedStates Department of Justice.

Lane, Michael. 1998. Customs Modernization and the Interna-tional Trade Superhighway. Westport, Conn.: QuorumBooks.

Raven, John. 2001. Trade and Transport Facilitation. DiscussionPaper No. 427. Washington, D.C.: World Bank.

Renton, David. 1975. The Preparation of Legislation: Report of aCommittee Appointed by the Lord President of the Council.House of Commons. Preparation of Legislation CommitteeSessional Papers. Volume xii, Cmnd. 6053, pp. 76–84;London: HMSO.

Steenlandt, Marcel, and Luc De Wulf. Custom Pragmatism andEfficiency: Philosophy of a Successful Reform. Morocco.

Stein, Jacob A., Glenn A. Mitchell, and Basil J. Mezines. 1977.Administrative Law. Washington, D.C.: Matthew Bender.

Thuronyi, Victor. 1996. “Drafting Tax Legislation.” In VictorThuronyi, ed. Tax Law Design and Drafting. Washington,D.C.: International Monetary Fund.

Turnbull, Ian. 1993. Plain Language and Drafting in GeneralPrinciples. Australian Office of Parliamentary Counsel.Canberra. www.opc.gov.au/plain/docs/plain_draftin_principles.doc.

United States Customs and Border Protection. 2003. Summaryof Laws Enforced by CBP. Washington, D.C.: United StatesDepartment of Homeland Security. www.Customs.ustreas.gov/xp/cgov/toolbox/legal/summary_laws_enforced.

WCO (World Customs Organization). 1997. Text of the RevisedKyoto Convention. Brussels. www.wcoomd.org/ie/En/Topics_Issues/FacilitationCustomsProcedures/Kyoto_New/Content/content.html.

———. 2000. “The Revised Kyoto Convention, General AnnexGuidelines, Chapter 3 Clearance and other formalities, Part6 Checking the Goods declaration.” Brussels.

———. 2004a. “Commercial Fraud Manual for Senior CustomsOfficials.” Brussels.

———. 2004b. “Model Provisions for National Legislation toImplement Fair and Effective Border Measures Consistentwith Agreement on Trade-related Aspects of IntellectualProperty Rights.” www.wcoipr.org.

WTO (World Trade Organization).1994a.“Agreement on Imple-mentation of Article VII of the General Agreement on Tariffsand Trade.” Geneva. www.wto.org/english/docs_e/legal_e/20-val.pdf.

———.1994b. “Annex 1C: Agreement on Trade-Related Aspectsof Intellectual Property Rights.” Legal Instruments—Resultsof the Uruguay Round. Vol. 31, 22I.L.M. 81. Geneva.www.wto.org/english/docs_e/legal_e/27-trips.pdf.

———. 1994c. “Decision on Texts Relating to Minimum Valuesand Imports by Sole Agents, Sole Distributors and SoleConcessionaires.” WTO Document LT/UR/D-4/1. Geneva.

———. 1994d. “Decision Regarding Cases Where CustomsAdministrations Have Reasons to Doubt the Truth or Accu-racy of the Declared Value.” WTO Document LT/UR/D-4/2.Geneva.

Zarnowiecki, Michel. 2003. “Managing Integrity in Customs.”Prepared for the International Anti-Corruption Conference.May 29–30. Seoul, Korea.

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67

4INTEGRITY IN CUSTOMS

Gerard McLinden

TABLE OF CONTENTS

Consequences of Corruption in Customs 68

Types of Corruption in Customs 70

The International Customs Response 72

Operational Conclusions 87

Further Reading 88

References 89

LIST OF TABLES

4.1 Customs Functions and Their Vulnerability toCorruption 69

4.2 Strategies to Reduce Corruptionin Customs 73

LIST OF BOXES

4.1 Leadership and Commitment: Key Issuesand Questions 75

4.2 Regulatory Framework: Key Issues andQuestions 76

4.3 Transparency: Key Issues andQuestions 77

4.4 Automation: Key Issues andQuestions 78

4.5 Modernization of Customs: Key Issuesand Questions 79

4.6 Audit and Investigation: Key Issues andQuestions 80

4.7 Code of Conduct: Key Issues andQuestions 81

4.8 Are Low Salary Levels Really aFactor? 82

4.9 Human Resources: Key Issues andQuestions 84

4.10 Morale and Organizational Culture: KeyIssues and Questions 85

4.11 Relationship with the Private Sector:Key Issues and Questions 86

4.12 Lessons Learned from Customs Reforms toControl Corrupt Behavior 88

In many developing countries, high levels of corrup-tion drastically reduce the effectiveness of key publicsector agencies. Customs administrations are noexception and are frequently cited as among the mostcorrupt of all government agencies. Given the vitallyimportant role customs plays in revenue collection,trade facilitation, national security, and the protec-tion of society, the presence of corruption in customscan severely limit a nation’s economic and socialprospects and national development ambitions.

This chapter describes the scope and nature ofthe corruption problem in customs and identifies arange of practical approaches that can be employedto address it. The chapter is designed to provide acomprehensive framework for analyzing the poten-tial effectiveness of a range of anticorruptionstrategies and provides practical guidance andadvice to customs officials, consultants, donors,and other stakeholders engaged in the identifica-tion and implementation of sound anticorruptionand integrity development strategies.

Attempts to deal with corruption in the past haveoften been frustrated by well-intentioned but totally

The author gratefully acknowledges the contribution of MichelZarnowiecki.

ineffective calls for the adoption of industrial coun-tries’ standards of administrative honesty, effective-ness, and efficiency or, perhaps, the adoption ofquick fix solutions designed to work around ratherthan deal with the problem. Recourse to preship-ment inspection services has at times been inspiredby such motives. To effectively tackle the problem ofcorruption in customs, a comprehensive and sus-tainable approach that addresses the underlyingcauses and consequences is required. There are noquick fix solutions. Rather, a pragmatic andsituation-specific approach is necessary—one thatdraws on the lessons learned from previous effortsaround the world and that takes into account thefundamental issues of motive and opportunity.

The first section of this chapter provides an intro-duction to the nature of the corruption problem incustoms and describes some important considera-tions to take into account when framing an effectiveanticorruption strategy for customs. It also providesan overall framework based principally on the workof scholars such as Robert Klitgaard. The second sec-tion reviews the international customs community’sresponse to the problem and outlines a comprehen-sive 10-point framework for tackling corruption, ascontained in the World Customs Organization’s(WCO’s) Arusha Declaration on Integrity in Cus-toms. The section also provides some practicalguidelines on how to develop, implement, and mon-itor a national customs integrity action plan andhow to establish a process and sustainable culture ofcontinuous improvement. A series of key issues andquestions are included in a simple checklist for eachof the 10 points (see boxes 4.1–4.7 and 4.9–4.11).The final section presents the key operational con-clusions derived from the chapter.

Consequences of Corruptionin Customs

Customs plays a central role in every internationaltrade transaction and is often the first windowthrough which the world views a country. The impli-cations of corruption in customs on a nation’s capac-ity to benefit from the expansion of the global econ-omy are obvious. Data obtained from the WorldBank’s Investment Climate Surveys indicate that 40percent of firms included in the 80-country surveyrate Customs/Trade regulation as a major or moder-ate constraint to business investment (World Bank2003). As business and investment decisions by

multinational companies are increasingly subjectedto international competition, the presence of wide-spread corruption in customs can act as a major dis-incentive to foreign investment. In addition, corrup-tion in customs takes on new significance in thecurrent environment of heightened concern aboutthe security of international trade. Sophisticated sys-tems and procedures designed to detect weapons ofmass destruction will offer little protection if they canbe circumvented simply by bribing customs officials.

In many developing countries, customs’ collec-tions continue to represent a large portion of gov-ernment revenue. Figures provided by the WCOsuggest that in many countries customs collectsover 50 percent of all government revenue (WCO2003a), and delays in the processing of imports andexports can cause significant losses, increase thecost of doing business, affect the competitiveness ofa country’s firms, and scare away foreign invest-ment. The presence of widespread corruption can,therefore, destroy the legitimacy of a customsadministration and severely limit its capacity tocontribute to government objectives. The adverseeffects of corruption within a customs administra-tion include the following:

• a reduction in public trust and confidence ingovernment institutions

• significant revenue leakage• a reduction in the level of trust and cooperation

between customs and other government agen-cies and between customs and relevant counter-parts in other countries

• low staff morale and esprit de corps (althoughthis is both an effect and a cause)

• a reduction in the level of voluntary compliancewith customs laws and regulations by the busi-ness sector

• a reduction in national security and communityprotection

• the maintenance of unnecessary barriers tointernational trade and economic growth

• increased costs, which are often borne by thepoorest sectors of the community.

Most, if not all, customs functions are susceptible tocorruption; however, the following activities are fre-quently cited as being particularly vulnerable as theyprovide both a motive for unscrupulous traders tocircumvent customs regulatory requirements and anopportunity for corrupt customs officials to seekbribes. Table 4.1 lists a number of areas and examples

68 Customs Modernization Handbook

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, andtransit declarations

Assessment of origin, value, andclassification of goods

Physical inspection, examination, andrelease of cargo

Administration of concessions,suspense and exemption schemes,and drawback schemes

Conduct of post-clearance audits

Issuing of import licenses, warehouseapprovals, and authorized traderstatus approvals

Processing of urgent consignments

Source: Author.

Soliciting or accepting payment to• 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.

Soliciting or accepting payments to• 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.

Soliciting or accepting staff who would• 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.

Soliciting or accepting payment to• permit traders to release, for domestic consumption and

without paying the required import duties, goods thatentered under suspense regimes or goods made with inputsthat entered under such regimes

• obtain a release of the bond that is to protect customsrevenues in cases of temporary admission of imports withoutadequate documentation

• permit traders to claim excessive input coefficients for exportsproduced with inputs that benefited from the suspenseregimes

• 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, orpermitting them to import such goods in excess of theamounts agreed to.

Soliciting or accepting payments to influence the outcome ofthe audit findings.

Soliciting or accepting payments to obtain these licenses andcertificates without proper justification.

Soliciting or accepting payments to obtain preferentialtreatment or speedy clearance.

where corruption can take place in customs. This listis not intended to be exhaustive.

Customs is vulnerable to corruption because thenature of its work puts its officials, even at juniorlevels, in situations in which they have sole author-ity and responsibility; in which they are authorizedto make important decisions on the level of duty ortaxes or admissibility of imports and exports; andin which careful supervision and accountability isdifficult. In addition, they work face-to-face withmembers of the trading community who have astrong incentive to influence the decisions made bycustoms officials. High tariffs and complex regula-tions offer significant incentives for traders to try toreduce import charges and speed up transactions.That many officials are poorly paid is often a strongincentive to accept or solicit bribes in the executionof their duties.

Types of Corruption in Customs

Irene Hors, of the Organisation for EconomicCo-operation and Development (OECD) Develop-ment Centre, has identified three types of corrup-tion that typically occur in the customs workingenvironment and suggests that the strategies neces-sary to deal with the three types of corruption varysignificantly (Hors 2001):

• routine corruption, in which private operatorspay bribes to obtain the speedy completion ofroutine customs procedures

• fraudulent corruption, in which the trader oragent asks customs officials to turn a blind eye tocertain illegal practices to reduce taxation liabil-ity or fiscal obligations

• criminal corruption, in which criminal opera-tors pay bribes to conduct a totally illegal butlucrative operation, such as drug trafficking orthe abuse of export promotion schemes.

Transparency International1 (TI) takes a differentapproach and divides corruption into two broadtypes: petty corruption and grand corruption (TI1997). Petty corruption is described as “survival”corruption—a form of corruption that is most

often pursued by relatively junior civil servants whomay be grossly underpaid and who depend on smallbut illegal rents to feed and house their families andpay for their children’s education. This correspondsclosely with Hors’ concept of routine corruption.2

Grand corruption usually involves more senior offi-cials and significant amounts of money. Like Hors,TI recognizes that different strategies are required todeal with the two types of corruption.

Without attempting to be exhaustive, it is usefulto consider a further classification of corruptionthat has practical applications to the customs work-ing environment, namely, bribery, nepotism, andmisappropriation (Nye 1977).

Bribery in the customs context includes the pay-ment of money to secure or facilitate the issuanceor processing of licenses, clearances, and authori-ties; payment to alter or reduce duty or taxation lia-bilities; payment to ensure that officials turn a blindeye to illegal activities; and payment or kickbacksprovided after the fact, to ensure that an individualsuccessfully obtains a lucrative exemption fromnormal administrative formalities. Customs offi-cials often have discretion over such disbursementsand may be tempted to corruptly charge monopolyrents. For example, in the Philippines prior to thereforms of the late 1990s, customs officials seemedto consider that they had the right to obtain com-pensation for their services. Businesses had becomeaccustomed to giving small bribes as part of theirstandard operating procedures. It was generallyaccepted that it was necessary to pay someone to“facilitate” even fully legitimate transactions, and tohave the services of someone personally friendlywith customs to avoid harassment. In Bolivia,before the reform of the late 1990s, many customsstaff worked pro bono and had to find compensa-tion by soliciting and accepting facilitationmoney—an officially sanctioned bribery system.

Nepotism in the customs context can includesuch behavior as the selection, transfer, or promo-tion of individuals or groups on the basis of anexisting relationship rather than on merit; theawarding of lucrative customs appointments; andthe allocation of scarce government resources toindividuals on a nonmerit basis. Nepotism is most

70 Customs Modernization Handbook

2. The terms “routine” and “petty” are used to describe a partic-ular form of corruption that is prevalent in many countries. Theimpact of such corruption is, however, far from inconsequentialand is frequently extremely damaging and difficult to control.

1. Transparency International is a nonprofit organization basedin Berlin with chapters in more than 60 countries. Its focus is oncorruption prevention at the international and local levels. ItsCorruption Perception Index is the most comprehensive quanti-tative indicator of cross-country corruption available.

often seen in the customs administrations ofmicrostates or in larger administrations that haveborder posts that are geographically remote fromheadquarters. Under such circumstances, customsofficials often develop close bonds with members ofthe small communities in which they live and workand find it extremely difficult to maintain an arms-length relationship with members of their extendedfamily or with members of the social or ethnicgroups to which they belong.

Misappropriation includes a wide range ofbehavior such as theft, embezzlement, falsificationof records, and fraud. It can be seen at the individ-ual, group, or organizational level. While this formof corruption has been reported in many industri-alized countries, it is also a common factor inthe customs administrations of many developingcountries in which administrative controls orchecks and balances are not always present andwhere systems to ensure appropriate supervisionand audit of financial transactions are not welldeveloped.

Corrupt behavior can range from the individualto the widespread and systemic. Many observersnote that corruption in customs is often wellorganized into networks, with members of the net-works sharing the obligation of distributing theprofits from corrupt practices with colleagues andsuperiors. This safeguards and protects the networkfrom outside intervention and disruption, render-ing its eradication extremely difficult. Corruptioncan be initiated by either the client or the agent (ittakes two to tango); can entail acts of omission orcommission; can involve illicit or licit services; andcan be practiced both inside and outside the organ-ization (Klitgaard 1993, p. 221).

Definition of Corruption

The World Bank and the WCO define corruptionsimply as “the misuse of public power for privatebenefit” (World Bank 2000). This definitionfocuses on the departure from, or contravention of,some form of public duty, and the provision orreceipt of some form of improper inducement.Criminal and fraudulent corruption mostly takesplace in secrecy, or at least without official sanction.Routine or petty corruption, however, is often prac-ticed with little secrecy. It goes by such names as“facilitation money” or “tea money.” While unlaw-

ful to accept such payments, in some countries thispractice is so widespread and such a central ele-ment of the working relationship between customsofficials and members of the business communitythat it has become a quasi-accepted practice. Fre-quently, the proceeds of the facilitation paymentsare pooled and shared among colleagues andsupervisors, often according to a well-specifiedformula.

An Analytical Framework for UnderstandingCorruption

A useful analytical framework to analyze corrup-tion is proposed by Robert Klitgaard (1988).3

Klitgaard suggests that corruption is most likely tooccur when agents (individuals or groups) enjoymonopoly power over clients, when agents enjoydiscretionary power over the provision of goods orservices, and when the level of accountability is low.According to this framework, the probability ofcorruption occurring follows a simple equation:

Corruption � Monopoly � Discretion� Accountability (C � M � D � A)

This framework has particular relevance for thecustoms environment where, due to an administra-tive monopoly, customs administrations are oftenthe only agency with responsibility for certainadministrative and regulatory functions; wherecustoms officials, at even relatively junior levels,enjoy considerable discretionary decisionmakingpower, and discharge important administrativefunctions; and where the level of supervision andaccountability is often poor.

Klitgaard’s framework has been influential inshaping the direction of the anticorruption effortsin several countries and has been used extensivelyin the development of the WCO’s Revised ArushaDeclaration on Integrity in Customs, as well asin a range of the WCO’s integrity-related tools.

Integrity in Customs 71

3. Klitgaard’s conclusions accord closely with those of IreneHors of the OECD Development Centre. Hors, drawing on thelessons learned from the anticorruption and modernizationefforts in the customs administrations of three countries, con-cluded that the customs working environment is vulnerable tocorruption because there is (a) a discretionary interface betweencustoms officials and private sector operators, (b) a possibilityfor customs officials to operate within a network of accomplices,and (c) a lack of official controls.

Klitgaard’s framework provides an overall concep-tual basis for examining the critical issues involvedin developing a sound anticorruption strategy.

Inspired by this framework, Klitgaard proposesthe following range of corrective strategies. Hisstrategies consist of five distinct but related steps.These include

• changing administrative systems to remove thecorruption-inducing combination of monopolypower combined with officer discretion pluslimited accountability

• selecting agents (in this case, customs officials)for incorruptibility as well as job-specific skillsand educational qualifications

• changing the rewards and penalties mix facingagents and clients

• increasing the likelihood that corruption will bedetected and punished

• altering attitudes toward corruption.

Klitgaard’s strategies and examples of their practi-cal application in the customs environment areillustrated in table 4.2.

The International CustomsResponse

The vast majority of literature available on institu-tional or administrative corruption in developingcountries can be described as problem reportingrather than problem solving. Beyond advocating theintroduction of effective and efficient customs pro-cedures, there is little material available that pro-vides practical solutions to the problems associatedwith predicting, controlling, and eliminating cor-ruption in public administration, particularly in thecustoms environment. In response to this, and inrecognition of the fact that customs is often cited asone of the most corrupt sectors of government, theinternational customs community, through theWCO, commenced work in the mid to late 1980s toformulate a comprehensive integrity and anticor-ruption strategy. This work resulted in 1992 in theunanimous adoption by World Trade Organization(WTO) members of the Arusha Declaration onIntegrity in Customs. Since that time, the ArushaDeclaration has become the principal anticorrup-tion framework for the WCO’s 162 member cus-toms administrations. But progress with stemming

corruption in customs had been slow. In reaction,the WCO called for a comprehensive review of theArusha Declaration and its practical implementa-tion in member administrations. This led to thepreparation of the Revised Arusha Declaration thatwas unanimously endorsed by the WCO Council inJune 2003.

The Revised Arusha Declaration on Integrity inCustoms consists of 10 distinct but related ele-ments considered essential for the developmentand implementation of a comprehensive and sus-tainable anticorruption and integrity enhancementprogram. It is consistent with the framework pro-vided by Klitgaard and is closely aligned with arange of internationally agreed on customs instru-ments, standards, and best practice approaches,including the Revised Kyoto Convention. It is alsodesigned to strike an appropriate balance betweenthe positive strategies (reform and modernization,leadership, progressive human resources [HR]management policies, and so forth) favored bymany within the international customs communityand the repressive strategies (sanctions, controls,investigation, prosecution) promoted by others.The 10 elements of the Revised Declaration follow:

• Leadership and Commitment • Regulatory Framework • Transparency • Automation • Reform and Modernization • Audit and Investigation • Code of Conduct • Human Resources Management • Morale and Organizational Culture • Relationship with the Private Sector.

Collectively, these 10 key elements are designed toreduce monopoly power and the inappropriate useof official discretion, and at the same time increasethe level of practical accountability. They linkdirectly to Klitgaard’s equation and strategies out-lined earlier in this chapter. In developing theRevised Arusha Declaration, the WCO was con-scious of the different social, political, and eco-nomic circumstances faced by its member adminis-trations. It therefore deliberately designed theDeclaration to be nonprescriptive in nature. Inother words, the Declaration provides a compre-hensive conceptual framework, but the actual

72 Customs Modernization Handbook

Integrity in Customs 73

TABLE 4.2 Strategies to Reduce Corruption in Customs

Strategy Practical Activities

Change administrative systemsto remove the corruption-inducing combination of monopoly power combined with officer discretion plus limited accountability

Select customs officials forincorruptibility as well as job-specific skills and technical competence

Change the rewards andpenalties mix facing agentsand clients

Increase the likelihood thatcorruption will be detected

Alter attitudes of staff andtraders toward corruption

Source: Author, based on Klitgaard 1988.

• Reengineer administrative systems or procedures to enhance trans-parency and predictability

• Introduce competition or contestability in the provision of keyservices

• Contract out selected customs functions • 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, andstreamline customs procedures

• Implement job rotation and staff mobility schemes• Increase transparency by publishing the criteria upon which officials

are entitled to exercise official delegations

• Widen the selection criteria for customs recruitment to includeintegrity-related factors

• Introduce merit as the key criteria for recruitment and promotion• Carefully screen potential employees, including references from

previous employers or educational establishments and backgroundchecks of potential criminal record

• Recruit senior officials who are known for their integrity from otheragencies and the private sector

• Evaluate the present remuneration levels and conditions ofemployment to ensure competitive conditions

• 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

• Undertake a thorough analysis of customs’ administrative systemsand 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 anonymityfor the information provided

• Ensure that punishments are meted out promptly, and vindicate stafffrom unjustified accusations; sanctions should be commensuratewith the severity of the violation and sanctions should be madepublic to serve as examples for others

• Instill esprit de corps in customs that will raise the moral costs ofcorruption

• 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 codeof 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

implementation of each key element is up to indi-vidual customs administrations.

A similar, nonprescriptive philosophy has beenemployed for all other WCO integrity-relatedmaterials, tools and training, and technical assis-tance programs that were developed as part of theWCO Integrity Action Plan. For example, to assistmember administrations to implement the provi-sions of the Revised Arusha Declaration and todevelop a culture of continuous improvement, theWCO has developed an Integrity DevelopmentGuide, established an Integrity Resource Center,prepared a Model Code of Ethics and Conduct, andconducts a range of national and regional integrityseminars, workshops, and training programs. In allof these tools or programs, the onus is on individ-ual customs administrations to develop and imple-ment realistic programs that are based on their ownneeds and circumstances.4

A summary of the Revised Arusha Declaration’s10 key elements, together with a list of recom-mended actions, follows. Where possible, discus-sion of the key elements has been complemented bythe introduction of country examples emanatingfrom the experiences of the World Bank and otherinternational organizations.

Leadership and Commitment

A firm commitment at the highest political level tomaintaining a high standard of integrity through-out customs is particularly important in societieswhere corruption is a widespread or systemic prob-lem. The government needs to be aware of the stepsthat customs is taking, and customs should ensurethat the government receives regular updates onprogress through publications, briefings, verifiableperformance indicators, and through the media.Effective integrity programs also require a highlevel of management support and leadership. It isimportant to set up clearly defined supervisory anddecisionmaking structures and obligations.

A strong champion at both the political and cus-toms management levels is essential. Frequentchanges at the top of the administration prevent aclear signal from being sent out, and damage credi-

bility, particularly with the private sector. An ade-quate political framework, strong commitmentfrom the government, and support from the busi-ness community are essential. In Bolivia, Morocco,and Peru, strong political backing for the reformfrom the highest political authority and unwaver-ing support from the business community were keyfactors in decreasing corruption. Feedback is alsoneeded, and can be provided by performance indi-cators, user surveys,5 and through consultationwith the business community.

Experience in several countries suggests, how-ever, that where corruption in customs has been along-term feature of the customs–business envi-ronment it is extremely difficult for managers andsupervisors to take a strong stance against staffengaged in corrupt practices that they themselveswere engaged in at earlier periods in their careers.In such cases it may be useful to examine the feasi-bility of introducing a limited official amnesty.Such an approach must, however, be introduced aspart of a comprehensive anticorruption strategyand should incorporate stiff new penalties forfuture breaches of integrity. Likewise, it should beaccompanied by a widely publicized zero tolerancepolicy and a commitment to investigate and prose-cute any future allegations of corruption. Caremust be taken to ensure that officials understandthat the amnesty is a “once only” opportunity toclear the slate.

Government actions are essential to demon-strating a commitment to combat corruption. Suchactions may include the establishment of ombuds-men, supreme audit bodies, and anticorruptionagencies. Such action however, can only becomeeffective if laws are enforced adequately. In HongKong (China), the Independent CommissionAgainst Corruption was successful because theagency was provided with independence, signifi-cant financing, direct citizen oversight, and consid-erable legal powers.

Box 4.1 reviews important questions to considerregarding top level commitment to eradicatingcorruption.

74 Customs Modernization Handbook

4. All WCO integrity-related tools are available on the WCOWeb site www.wcoomd.org.

5. See www.seerecon.org/RegionalInitiatives/TTFSE/ for adescription of performance indicators and surveys used inSoutheast Europe under the World Bank–supported Trade andTransport Facilitation program.

Regulatory Framework

Customs administrations should simplify theirlaws, regulations, administrative guidelines, andprocedures so that customs duty assessment andclearance can proceed without undue delay and redtape. This often involves changing or restructuringcurrent systems and procedures to reduce or elimi-nate pointless bureaucratic processes. In manycases this will involve elimination of nontariff regu-lations, unnecessary steps, or duplication in admin-istrative procedures.

Possible strategies to minimize regulationinclude the adoption of internationally agreed onstandards, including the Harmonized System (HS)Tariff Convention, WTO Valuation Agreement, AirTransport Association (ATA) Carnet Convention orIstanbul Convention, WTO Trade-Related Aspectsof Intellectual Property Rights (TRIPS) Agreement,and WCO Revised Kyoto Convention on theHarmonization and Simplification of CustomsProcedures. In this regard, Bolivia, Cameroon,Morocco, Mozambique, Peru, and Turkey have alladopted new Customs Codes that have allowed theintroduction of new and simplified proceduresmore in line with evolving business practices.Barriers to the free flow of goods, such as nontariffregulations on quotas, import licenses, and per-mits, should also be reduced or rationalized to thefullest extent. Where possible, the number of tariffrates should be moderated.

The rationalization of both tariff and nontariffbarriers extends beyond the policy responsibility ofthe customs administration. In this respect, cus-

toms should maintain a close relationship withother responsible agencies, for example, throughregular interdepartmental liaison processes. A keyinitiative is the adoption of risk management prin-ciples to ensure that trade and travel risks areassessed, and to identify and investigate integrityrisks within the organization (see annex 1.D forfurther comments on this subject).

Box 4.2 presents key questions for assessing cus-toms’ regulatory framework with regard to pro-moting integrity.

Transparency

Transparency is a key issue for all customs adminis-trations. Increasing accountability and maintainingan open and honest relationship with clients andstakeholders is crucial to maintaining public trustand confidence in the performance of customsfunctions. Clients must be able to expect a highdegree of certainty in their dealings with customsauthorities. This can only be achieved when cus-toms laws, regulations, procedures, and administra-tive guidelines are made public, are easily accessi-ble, and are applied in a consistent manner. Anydeviations from laws, regulations, and discre-tionary power should be justified and documentedfor later review. In Pakistan, the lack of trans-parency in the design of a customs reform projectwhere no diagnostic report was made public, andthe lack of participation by supporting interests,clearly contributed to the project’s failure to achieveits initial objectives (Hors 2001).

Integrity in Customs 75

BOX 4.1 Leadership and Commitment: Key Issues and Questions

Has high-level multipartisan support and politi-cal commitment to the fight against corruptionbeen obtained?

Have the government and customs adminis-tration adopted a zero tolerance policy?

Are “big fish” as well as small ones investi-gated and prosecuted?

Are clear responsibilities, obligations, andaccountability for all customs managers, supervi-sors, and staff established and understood?

Is promotion to managerial positions depen-dent on integrity performance?

Do senior managers and supervisors lead byexample?

Are periodic surveys conducted to assessstakeholders’ perceptions of customs’ commit-ment to integrity?

Does customs lead or participate in widerall-of-government integrity initiatives?

Is appropriate priority afforded to the anticor-ruption strategy in corporate vision, mission, val-ues, resource allocation processes, and strategicplanning documents?

Has the use of an official amnesty been con-sidered?

Source: Based on WCO 2003b.

Administrative or judicial review should be avail-able. In the first instance, such a review should bemade on an internal basis. However, clients shouldalso have access to an independent, external review.In developing or implementing appeal or reviewmechanisms, an appropriate balance should bestruck between the need to make the process inex-pensive, timely, and accessible and the need toensure that it is not used inappropriately for frivo-lous appeals. Client service charters are a way toincrease accountability and demonstrate customs’commitment to provide quality service to clients.Service standards should be challenging but realisticand should be fully supported by the organization’ssystems and procedures. Achieving a consistentlyhigh degree of transparency is not an easy task but itis vital to the development of a comprehensiveintegrity program.

The experience of the Zambian RevenueAuthority (ZRA) provides a practical example ofwhat can be achieved when a commitment toincreased levels of integrity is made. The ZRAhas introduced a number of positive initiativesdesigned to increase clients’ awareness of customsrules and regulations. These include publication ofinformation brochures and posters, developmentof a public Web site, and regular participation inpublic radio programs. In Morocco, the customsWeb site contains the essential rules and regulationsgoverning customs operations as well as data oninternational trade and various performance indi-

cators, including detailed and regularly updatedclearance times. In Peru, customs uses its Web siteto make available to users and to the public in gen-eral, information on customs rules and regulations,and all its activities and programs, including thedetails of various customs declarations processed.In Turkey, legislative arrangements are updated oncustoms’ official Web site and traders are providedwith guidance on the formal procedures to be usedfor seeking advanced rulings on tariff and valua-tion. Internal transparency standards can beenhanced by maintaining a tracking and analysissystem for compliments or complaints, ensuringthat any complaints are examined and dealt withpromptly, as in Morocco, and that an audit trailexists to enable monitoring of the exercise of officerdiscretion.

Box 4.3 provides examples of questions to raisewhen assessing the transparency of customs.

Automation

Computerization of core customs processes canimprove efficiency and effectiveness and removeopportunities for corruption. Well-designed andimplemented systems can minimize unnecessaryface-to-face contact between officials and clientsand reduce opportunities for the improper exerciseof discretion. Automated systems can also be con-figured to maximize the level of accountability andprovide a reliable audit trail for later evaluation and

76 Customs Modernization Handbook

BOX 4.2 Regulatory Framework: Key Issues and Questions

Have customs laws, regulations, administrativeguidelines, and procedures been reviewed, har-monized, and simplified to reduce unnecessaryduplication and red tape?

Has a process of continuous review andimprovement of systems and procedures beenintroduced?

Have tariff rates been moderated and thenumber of different rates of duty rationalized?

Has a formal process for the review andrationalization of exemptions and concessionsbeen introduced?

Has a program of consultation and coopera-tion with other government agencies beenestablished to examine means of rationalizingregulatory requirements?

Have internationally agreed on conventions,instruments, and accepted standards includingthe Revised Kyoto Convention, the WCO HSConvention, the WTO Valuation Agreement, theATA Carnet Convention, and the WTO TRIPSAgreement, been implemented?

Do regional customs unions and economicgroups adopt internationally agreed on stan-dards and work toward regional harmonizationof systems and procedures?

Does the administration actively participatein international benchmarking and informationsharing initiatives?

Source: Based on WCO 2003b.

review. Automation can be used to eliminate themost vulnerable points in manual systems.Automation, however, is unlikely to assist the anti-corruption effort if it is not combined with otherreform measures. For example, the introduction ofan automated entry processing system will certainlyreduce the opportunities for customs officials toseek illegal payments for making certain decisions;but it may also simply result in shifting the point ofcorruption to a part of the process that is not auto-mated. By way of example, in the case of cargoclearance, the point of collection of illegal feescould simply shift from the duty assessment phaseto the cargo examination or delivery phase.

Automated systems can be vulnerable to attackand manipulation from both inside and outside theorganization. This is a particular threat in manydeveloping countries where access to skilled andprofessional IT experts may be extremely limited.For instance, field work of World Bank staff high-light some of these. In one case, the system of ran-dom allocation had been implemented to break theunhealthy relationship that had developed betweentraders and officers; but customs staff learned howto manipulate the system by running the softwareuntil a “suitable” officer was selected. In anothercase, the main software introduced to handle theprocessing of declarations and computation ofduties was manipulated by officers to maintainparallel registers. In another case, cars exiting theport illegally were found to possess fake declara-tion forms, produced using official systems andprocedures.

Tight security checks should be undertaken andappropriate supervision and accountability systemsestablished, particularly when external consultantsor contractors are involved. Where sensitive infor-mation is stored on automated systems a suitableaudit trail needs to be established to protect theinformation and identify any officials who mayaccess information for private or inappropriatepurposes.

Customs must respond to changing interna-tional trade practices that increasingly involve theuse of electronic commerce. The electronic servicedelivery of customs functions improves efficiencieswithin the organization and the trading commu-nity and provides a mechanism to reduce theopportunity and incentives to engage in corruptbehavior. The experience of the Philippine Bureauof Customs is illustrative of the capacity of automa-tion to drastically improve efficiency and eliminateopportunities for corruption. Prior to automation,processing customs declarations involved thesubmission of numerous documents logged in 20separate registers, more than 90 separate steps, andmore than 40 signatures. Automation, coupled witha range of supporting reforms, has resulted in asignificant reduction in clearance times. It hasalso significantly reduced the opportunities forface-to-face contact between customs officialsand traders and the inappropriate use of officialdiscretion.

Important questions to consider in reviewingthe role of automation in corruption preventionefforts are in box 4.4.

Integrity in Customs 77

BOX 4.3 Transparency: Key Issues and Questions

Have customs laws, regulations, procedures, andadministrative guidelines been made public andare they easily accessible?

Has the basis upon which customs officialsare entitled to exercise their discretionary powerbeen defined and are variations recorded forlater review and monitoring?

Have administrative and judicial appealmechanisms been established that allow cus-toms decisions to be challenged?

Have advance tariff and valuation rulings sys-tems been implemented?

Have Customs Service Charters and perform-ance targets been established that are challeng-ing but realistic and is the administration’s per-formance reported to the public?

Does the administration use a range of mediato publicize information, including brochures,posters, Web site, and the mass media?

Are all fees and charges publicized?Have help desks been established to assist

clients in complying with customs requirements?

Source: Based on WCO 2003b.

Reform and Modernization

Corruption typically occurs in situations whereoutdated and inefficient practices are employedand where private sector operators have an incen-tive to attempt to avoid slow or burdensome proce-dures by offering bribes and paying facilitation fees.Customs administrations should reengineer orreform and modernize systems and procedures toeliminate any perceived advantages that might beobtained through circumventing official require-ments. Such reform and modernization initiativesshould be comprehensive in nature and shouldfocus on all aspects of customs operations and per-formance.

This conclusion was also reached by Hors insummarizing the outcome of a series of studies intothe reform initiatives that had been undertaken bythree customs administrations. She suggests thatthere is a need to identify those points in the cus-toms system that provide special opportunities forcorruption and to eliminate or reengineer customssystems and procedures to reduce the opportunitiesfor corruption and provide less incentive for pri-vate sector personnel to pay bribes to customs offi-cials (Hors 2001). The International Chamber ofCommerce (ICC) also notes that increasing overallefficiency and effectiveness is the most appropriateapproach to tackling corruption in customs admin-istrations (ICC 1997).

Reform and modernization of a customsadministration should be based on a comprehen-

sive diagnosis of its needs and should be tailored tothe individual circumstances and aspirations of theadministration concerned. A sound reform andmodernization program should focus on simplify-ing and harmonizing systems and procedures, becomprehensive in nature, address all customs rolesand responsibilities, involve all key stakeholders,focus on developing local ownership, be sustainablein the longer term, and have sufficient resources toensure effective implementation. The preparationof a corruption risk map can be a useful element ofthis process.

Customs administrations should be regarded bygovernments as important national assets and toolsfor trade facilitation, revenue collection, commu-nity protection, and national security. Comprehen-sive reform and modernization programs shouldfocus on achieving improved performance in eachof the following core customs areas:

• Leadership and strategic planning • Organizational and institutional framework• Resources (human, financial, and physical)• External cooperation and partnership• Good governance• Customs systems and procedures• Legal framework• Change management and continuous improve-

ment• Information technology• Management information and statistics.

78 Customs Modernization Handbook

BOX 4.4 Automation: Key Issues and Questions

Have automated systems for declaration pro-cessing and cargo reporting been introducedbased on the IT guidelines contained in theRevised Kyoto Convention and the WCO DataModel?

Have the systems been designed to do thefollowing:• incorporate appropriate risk assessment and

selectivity capabilities • minimize the need for officials to exercise dis-

cretionary authority• minimize face-to-face contact between cus-

toms officials and traders• record any variations or exercise of discre-

tionary powers for later review and audit

• accommodate automated payment or elec-tronic funds transfer systems?

Is the IT infrastructure appropriately managedand has adequate provision been made forongoing hardware and software maintenanceand replacement?

Have appropriate provisions been made tosecure the systems from internal or externalmanipulation?

Have appropriate provisions been made toensure the effective integration of manual andautomated systems?

Source: Based on WCO 2003b.

In Bolivia, Cameroon, Morocco, Mozambique,Peru, the Philippines, Turkey, and Uganda, thereform programs generally covered issues relatingto all components of customs administration,including the legal framework, systems and proce-dures, IT, strategic management, personnel, andorganizational structure.

The Peruvian Customs provides an excellentexample of what can be achieved through theimplementation of a comprehensive reform andmodernization program. In 1963, Peruvian Cus-toms was characterized by corruption and incom-petence. The reform process involved firing corruptemployees, conducting tests of competence, train-ing, hiring new professionals, establishing stan-dards for cargo clearance, tariff simplification, andestablishing reduced duty rates. Over a five-yearperiod, staffing was reduced by 30 percent andcargo clearance time was reduced from 15–30 daysto 1–2 days. As a result, imports doubled and rev-enue collections quadrupled (Lane 1998). In thecase of Morocco, improving integrity was notincluded as a specific priority in their reform andmodernization program, but rather, was achievedas a positive byproduct of the program.

Box 4.5 reviews questions crucial to determiningthe role of modernization in battling corruption incustoms.

Audit and Investigation

Mechanisms to detect corruption and identify andreduce organizational vulnerabilities are primaryelements of any effective corruption preventionstrategy. Regardless of the severity of penalties pro-

vided, they will offer little deterrence if the proba-bility of detection and prosecution is low. Internaland external audits can review processes and pro-cedures with the aim of focusing on high riskareas. Audits also provide an independent opinionregarding the efficiency and effectiveness of cus-toms procedures and controls. The audit processshould include internal check programs, randomsampling, and on-the-spot checks. To prevent col-lusion between customs officials and clients and toavoid clients anticipating customs actions, a taskforce comprising staff from different work areasmay be set up to conduct unannounced specialoperations or checks at various high risk customsposts at irregular intervals. On-the-spot inspec-tions should be conducted frequently enough toprovide a real deterrent to corrupt behavior.

The development of a comprehensive risk map,which identifies functional areas and processes thatare most vulnerable to corruption, can usefullyguide the audit opportunities. The risk map shouldbe administration-specific and cover all functionalareas and key processes. Staff closely involved ineach of the functional areas should participate inthe preparation of the risk map. Likewise, privatesector operators should be consulted to identifytheir perspective on the most vulnerable parts ofthe customs system, the key concept being that thestaff and clients most closely involved in particularcustoms processes are best equipped to identifyparticular vulnerabilities and to devise correctivestrategies.

The organization should have the necessaryresources to follow up and investigate any allega-tions or information provided. Mechanisms should

Integrity in Customs 79

BOX 4.5 Modernization of Customs: Key Issues and Questions

Is customs regarded by the government and thebusiness sector as a key national asset and toolfor trade facilitation, revenue collection, com-munity protection, and national security?

Is customs ranked high on the list of govern-ment priorities for international donor assis-tance?

Has a comprehensive and long term reformand modernization program been establishedthat is• adequately resourced, with roles and responsi-

bilities clearly defined

• based on an accurate diagnosis of needs• focused on simplifying and harmonizing sys-

tems and procedures• well supported by all stakeholders including

staff• effectively coordinated and managed at the

local level• based on sound performance data and objec-

tive performance measures?

Source: Based on WCO 2003b.

also be in place to encourage staff and stakeholdersto report corrupt practices, including confidential-ity provisions. For example, there should be a chan-nel for staff to report corrupt practices directly tothe most senior level, bypassing their immediatesupervisors. Along these lines, in 2002 the Com-missioner of the Ugandan Revenue Authorityestablished a confidential e-mail address and tele-phone number to allow staff to report corruptpractices and officials. Customs managers andclients should promote recourse to independentanticorruption agencies as a means of demonstrat-ing the organization’s commitment to tackling cor-ruption. In recent years the Hong Kong Customsand Excise Department has worked closely withthe Independent Commission against Corruption(ICAC) to strengthen the level of integrity withinthe organization. In addition to investigating seri-ous allegations against customs personnel, ICAChas provided training to customs officials and hasdone much to increase the level of public confi-dence in the customs administration.

Staff allocated to audit and investigation workshould be appropriately skilled and qualified for therole they are to perform. In recognition of the skillrequirements necessary to undertake effective inter-nal audit and investigative work, the Australian Cus-toms Service outsourced its internal audit functionto a private audit company. Likewise, an experi-enced former Australian Federal Police officer wasselected to head its Internal Affairs Unit. The organ-ization does, however, maintain effective controlthrough a national audit committee made up ofmembers of the senior management team andthrough the development of an annual audit planthat specifies the priorities for the coming year. It

also relies on external audit, which is provided bythe Australian National Audit Office.

Box 4.6 outlines important questions aboutthe role of audit and investigation in eliminatingcorruption.

Code of Conduct

A key element of any sound integrity programmust be the development, issuance, and acceptanceof a comprehensive code of conduct that sets out,in very practical and unambiguous terms, the stan-dards of behavior and conduct required of employ-ees and all customs officials. An effective code ofconduct also provides a guide to solving ethicalissues for those working in customs and those whohave dealings with customs officials. The content ofthe code should be regularly reinforced to staff.6

To assist customs administrations in developingappropriate codes of conduct, the WCO has pre-pared a Model Code of Ethics and Conduct7 thatsets out the following key elements:

80 Customs Modernization Handbook

BOX 4.6 Audit and Investigation: Key Issues and Questions

Have effective monitoring and control mecha-nisms been established, including internal auditfunctions and internal check responsibilities?

Is the administration subject to regular andprofessional external audits?

Does the administration develop and main-tain a strategic audit plan that identifies prioritiesand ensures that audit findings and recommen-dations are implemented?

Are staff working in audit and investigationareas appropriately qualified to undertake theirtasks?

Has an internal investigation or internal affairsunit been established to promptly investigateallegations of corruption?

Has a detailed risk map of the administrationbeen developed to identify particular vulnerabili-ties and devise appropriate corrective strategies?

Does the administration make use of theappropriate independent anticorruption author-ities to deal with large-scale cases or allegationsagainst senior officials?

Source: Based on WCO 2003b.

6. Within the framework of the Free Trade Area of the Americas,trade ministers discussed customs-related issues in LatinAmerica and the Caribbean. Participants followed up on workundertaken since 2001 on a new code of conduct for the region,which was designed to be more robust than existing codesaround the world. The code seeks to be wide in scope and defi-nite in its provisions and places emphasis on prevention ratherthan punishment. The code also establishes an independentmonitoring authority and provides a role for civil society. TheInter-American Development Bank, which is financing theinitiative, is requiring all Latin American countries without acode of conduct for customs officers to implement this newcode. It has already been implemented in Honduras, Paraguay,St. Vincent and the Grenadines, Dominica, and Grenada.See www.regionaladuanas.org

7. See the WCO Web site at www.wcoomd.org.

• Personal responsibility. Explains the personalresponsibilities and obligations that all officialshave to comply with the provisions of the code.

• Compliance with the law. Explains the need forofficials to operate within the appropriate legalframework.

• Relations with the public. Explains the need forofficials to maintain professional standards ofservice and behavior in their dealings with thepublic.

• Acceptance of gifts, rewards, hospitality, and dis-counts. Explains the rules and circumstancesassociated with the acceptance and rejection ofoffers of gifts, rewards, hospitality, travel, anddiscounts.

• Avoiding conflicts of interest. Explains the rulesassociated with officials participating in com-mercial enterprises, holding shares, beinginvolved in government contracts and tender-ing, and engaging in other paid employment.

• Political activities. Explains the rules associatedwith officials engaging in political activities suchas fundraising, elections, and commenting ongovernment decisions and policy.

• Conduct in money matters. Explains the rulesassociated with managing private financial mat-ters and the handling of official funds.

• Confidentiality and use of official information.Explains the rules for the care of official infor-mation, documents, records, and so forth,whether paper-based or stored electronically.

• Use of official property and services. Explains therules associated with the use and care of officialassets and property.

• Private purchases of government property by staff.Explains the rules associated with officials

purchasing government property such as seizedor forfeited goods.

• Work environment. Explains the need to foster ahealthy, safe, and productive working environ-ment and covers issues such as fairness andnondiscrimination, occupational health andsafety, misuse of drugs and alcohol, smoking,standards of dress, and security.

Several customs administrations, including theCzech Republic and Turkey, have used the WCO’sModel Code of Conduct to develop their own codesof conduct.

Issues and questions regarding the role of a codeof conduct are contained in box 4.7.

Human Resources Management

Staff remuneration and career management are keyHR issues that can seriously affect integrity incustoms.

Staff Remuneration A key element in any effec-tive integrity strategy is managing the personalintegrity of staff. People management is just asimportant as the reform of systems and procedures.Human resources (HR) policies should not only beaimed at recruiting and firing staff, but alsoimproving staff skills and providing a work envi-ronment that recognizes and supports the efforts ofstaff. (See chapter 2 for further information on HRmanagement issues in customs.)

Providing appropriate conditions of employ-ment and, in particular, remuneration that includesbonuses and rewards for good performance, andthat can sustain a reasonable standard of living, are

Integrity in Customs 81

BOX 4.7 Code of Conduct: Key Issues and Questions

Has a comprehensive code of conduct compati-ble with the WCO model been adopted?

Are the contents of the code clear and unam-biguous and the penalties for noncomplianceunderstood by staff?

Are all managers and supervisors required tolead by example or is there “one rule for us andanother for you?”

Are all staff required to read, understand, andendorse the code?

Is prompt and appropriate action taken toredress any breaches of the code that are identi-fied?

Has a periodic review process been estab-lished?

Were staff and clients consulted during thedevelopment of the code?

Source: Based on WCO 2003b.

crucial. Indeed, severe penalties applied to breachesof a code of conduct are more likely to be acceptedin circumstances where the difficult working envi-ronment and required levels of integrity are recog-nized in the base level of remuneration. However,levels of remuneration all too frequently areextremely low in customs. In Cambodia, forinstance, the average annual civil service salary, atUS$0.60 per day, is well below private sector pay,even for unskilled workers, and creates severe pres-sures to engage in additional income-generatingactivities just to meet basic household expenditures(World Bank 2001).

In recent years, several countries have estab-lished Autonomous Revenue Agencies (ARAs) as ameans of improving the efficiency and effectivenessof customs, and in the process have significantlyincreased the level of remuneration paid to revenueofficials without having to increase salaries in othersectors of public administration. However, inseveral instances these higher remuneration levelscould not be maintained. (See chapter 2 andbox 4.8.)

While the research on the long-term impact ofpublic sector salaries is inconclusive, there is littledoubt that staff will identify and exploit the manyopportunities for illegal rent-seeking if customsofficials are not provided with sufficient remunera-tion to provide a basic standard of living for them-selves and their families. This is particularly thecase for customs officials engaged in preventive,enforcement, or audit activities where discretionarypowers are significant and the environment is notconducive to effective supervision and accountabil-ity. In addition, remuneration should be geared totake into account the sometimes dangerous anddifficult working conditions and associated hard-ships faced by customs officials, particularly inremote border stations.8 Anticorruption programsthat fail to address this issue are likely to fail in thelonger term. In essence, better salaries can begin to

82 Customs Modernization Handbook

BOX 4.8 Are Low Salary Levels Really a Factor?

Based on the results of a study into the customsadministrations of three developing countries,Irene Hors of the OECD Development Centreidentified low salary levels as a contributing fac-tor in the development of corruption within oneEast Asian customs administration. She notedthat salary levels for junior officials had not takenaccount of inflation and increases in the cost ofliving, and that employees living within theirsalaries simply could not rent houses or educatetheir children. She did, however, question thelink between remuneration and corruption athigher levels in the customs hierarchy. In thisrespect she noted that among senior officials,who sometimes enjoyed relatively generous lev-els of salary and working conditions, ostenta-tious living and extravagant expenditures hadbecome the norm and that the officials’ behav-ior had become conditioned by the behavior ofa wider elite, which customarily indulged in ille-gal activities and paraded excessive riches. Sheconcluded by noting that there is probably acontinuum of gradually changing situationsbetween officers who are practically obliged toengage in corruption to provide for basic needsand those who are drawn to bribery by the pres-sures of social emulation and greed.

Fjeldstad, Kolstad, and Lange (2003), drawingon the experiences of Uganda and Tanzania,where wage rates and conditions of employmentwere increased significantly following the adop-tion of the ARA model, suggest that even with rel-atively high wages and good working conditionscorruption may continue to thrive as pay rates cannever effectively compensate officials for theamount they can gain through bribery. Moreover,if wage increases are granted but subsequentlynot maintained in real terms, then the increasesmay in fact result in less effort and more corrup-tion than if wages had remained constant.Increased pay may also imply more extensivesocial obligations resulting in a net loss to theemployee. Likewise, in the civil service context,wage increases in one department could result inofficials in other agencies viewing their ownremuneration as unfair with detrimental conse-quences for wider civil service morale. Theyconclude that without extensive and effectivemonitoring and an overall program of moderniza-tion, wage increases may simply produce a highlypaid but also highly corrupt administration.

Sources: Hors 2001; Fjeldstad, Kolstad, andLange 2003.

8. For example, in many former socialist countries, border policeofficers are paid on average 30 percent more than customs offi-cials performing similar duties.

Integrity in Customs 83

address corruption problems that stem from needbut not from greed.

Recruitment and Staff Selection Recruitmentand staff selection procedures should be based onmerit and should focus on selecting staff for theirincorruptibility as well as their academic, profes-sional, or technical competence. The importance ofappropriate recruitment and selection policies isclearly demonstrated in surveys conducted by theWorld Bank in Albania, Georgia, and Latvia. Thesurveys demonstrate that bureaucrats are willing topay for appointment to agencies that are regardedas the most corrupt, and for promotion or deploy-ment to positions in which they are able to obtainillegal rents based on the exercise of official discre-tion.9 The administrative processes associated withrecruitment and promotion should be fair, objec-tive, and free of bias. Recruitment and promotioncommittees should be composed of independentmembers selected from different areas of theorganization. Such an approach reduces thechances of nepotism and corruption.

Some countries and customs administrationshave adopted drastic measures to improve thequality and integrity of their staffs, including firinga significant percentage of officials. Evidence sug-gests, however, that while such drastic approachescan deliver short-term gains, the benefits areinvariably short lived if not supported by widerreform initiatives. Moreover, the maintenance ofsuch policies is resource intensive and difficult tosustain in the longer term. An additional factorthat needs to be considered is the impact that thedeparture of a large number of experienced offi-cials will have on the wider customs–business rela-tionship. Experience in several countries suggeststhat many customs officials sacked in large-scalestaffing purges readily find work on the otherside of the counter working for customs brokersand in the import/export sector leading to anextension of existing unofficial networks.10 The

conclusion, therefore, is that the operationalenvironment for customs work, rather than indi-vidual officials, determines the level of corruption.Care needs to be taken when introducing newlegislation and HR management policies to ensurethat increased managerial freedom to hire andfire is not used to enable politically motivatedfirings or to introduce a level of job insecuritythat simply encourages officials to seek short-term financial gain rather than build long-termcareers.

Mobility and Random Job Assignments Enhanc-ing staff mobility can substantially augmentintegrity. Job segregation can also be limited sothat a number of officials are able to discharge thesame discretionary functions. This will ensure thatclients do not have to deal with only one officialwho can abuse discretionary power. In cases whereexaminations or inspections need to be under-taken, allocation to individual officials may bemade on a random rather than on a commodity,industry, or geographic basis. The performance ofexaminations or inspections can also be subject toregular peer and independent reviews. Manycountries do, however, face significant difficultiesin introducing staff rotation or mobility schemes.Issues such as cost, available housing, and educa-tion opportunities at regional offices or remoteborder posts prevent the introduction of appro-priate mobility schemes. In such cases it is impor-tant to look at opportunities for job segregationand mobility within the regional office or borderpost.

Training Education and training play a majorrole in the fight against corruption in two ways.First, they provide staff with appropriate profes-sional development, thus increasing technicalcompetence and reducing reliance on informalon-the-job training. While on-the-job training isimportant, care needs to be taken to ensure that it isboth positive and structured and does not inadver-tently reinforce certain inappropriate practices thathave developed over time. Second, education andtraining provide regular opportunities for theorganization to reinforce the integrity and anticor-ruption message. This is particularly appropriatewhen an organization is introducing a formal codeof conduct.

9. World Bank surveys of 218 public officials in Latvia, 350 pub-lic officials in Georgia, and 97 public officials in Albania (Kauf-man, Pradhan, and Ryterman 1998).

10. In addition, the firing of large numbers of staff and theirreplacement by a group of new and more qualified officials hassometimes resulted in the reemergence of corruption on a moresophisticated scale and increased incentives to bribe based oninsecurity of employment tenure.

84 Customs Modernization Handbook

Performance Evaluation A performance appraisaland management system concerns the day-to-daymanagement of people and their performance.Regular appraisals tied to compensation reviewsencourage staff to take responsibility for maintain-ing high levels of integrity. Performance appraisalcan encourage staff to participate in activitiesdesigned to reduce or control corruption, andreward those who have been able to identify meth-ods by which corruption can occur and for suggest-ing improved control mechanisms. The reward sys-tem may include nonmonetary rewards such astransfer, training, travel, praise, and publicity tofurther encourage positive behavior. The appraisalsystem should be designed to optimize staff per-formance in the long term. Performance appraisalshould be undertaken on a regular basis. Manage-ment should be held accountable for the perform-ance of staff and should actively handle perform-ance issues.

Box 4.9 contains issues and questions critical tothe HR function’s role in promoting integrity.

Morale and Organizational Culture

Corruption is most likely to occur in organiza-tions in which morale or esprit de corps is low andcustoms personnel do not have pride in the repu-tation of their administration. Customs employ-ees are more likely to act with integrity whenmorale is high, if HR management practices areseen as being fair, and if there are reasonableopportunities for career development and pro-gression for all well-performing officials.11

Employees at all levels should be actively involvedin the anticorruption program and should beencouraged to accept an appropriate level ofresponsibility for the integrity of their adminis-tration. Integrity must be regarded as everyone’sresponsibility and obligation.

BOX 4.9 Human Resources: Key Issues and Questions

Has a comprehensive and strategically focusedHR management strategy been introducedincorporating sound polices on• recruiting and retaining the right people• developing and improving professional com-

petencies and skills• recognizing and supporting integrity efforts?Is staff remuneration comparable to similar pub-lic or private sector positions and sufficient toallow a reasonable standard of living?

Have procedures been established that canidentify and support staff with financial difficul-ties?

Are objective and merit-based selectionprocesses employed that identify personalintegrity as well as academic or technical com-petence?

Are procedures in place to ensure appropriatesecurity vetting for potential staff during recruit-ment, and for existing staff periodically?

Are selection committees impartial and madeup of officials from different work areas?

Has a staff transfer or rotation policy beenimplemented with clear and unambiguous ruleson the regular movement of staff from high-riskpositions?

Have all high-risk positions and functionsbeen identified and systems and proce-dures modified to limit the exercise of officialdiscretion?

Are appropriate informal and formal trainingand professional development opportunitiesprovided to build technical competence andpromote integrity?

Are the administration’s code of conduct andthe individual responsibilities of officials regularlyreinforced during training and professionaldevelopment programs?

Has a performance appraisal system beenimplemented that is fair, regular, monitored,and periodically reviewed?

Are managers and supervisors required toactively manage staff performance and perform-ance issues?

Are managers and supervisors held responsi-ble for the integrity performance of officersunder their control?

Source: Based on WCO 2003b.

11. It is often suggested that experienced customs officials whoare prevented from further career advancement or promotionby, for example, the lack of prescribed academic qualificationsare the most likely to engage in corrupt behavior and, due totheir extensive experience, the most unlikely to be detected.

Integrity in Customs 85

Corruption is often not restricted to customs,but a phenomenon that is prevalent in the societyas a whole. Integrity campaigns in customs must befully cognizant of this and are likely to be most effi-cient if they are part of a nationwide anticorrup-tion effort. Such campaigns will raise the moralcosts of corruption, but will require that appropri-ate changes in the organizational culture be imple-mented for the changes to last.

Certainly, while politicians and senior customsofficials regularly denounce corruption in all itsforms and openly describe it as a significant obsta-cle to development, there is often a huge gulfbetween the rhetoric and reality. Some observersnote that corrupt practices are often not linked toshame and people who engage in them conducttheir activities with a clear conscience. Moreover,there may be no social stigma for being dismissedfrom one’s position due to corruption. The issue ofculture and its acceptance of corruption extendsbeyond individual customs administrations towhole societies and regions. It is frequently arguedthat the traditional social norms that govern theconduct of public office in industrialized countriesare quite different from those that govern thebehavior of officials in many developing countries.In many developing countries there exists a gapbetween law (as imposed by Western and Alienstandards) and informal social norms (sanctionedby prevailing social ethics) i.e., there is a divergencebetween the attitudes, aims, and methods of gov-ernment of a country and those of the society inwhich they operate (Caiden and Caiden 1977).

Many traditional societies value kinship and rec-iprocity, which serve important social functions,such as the provision of an informal insurance

network during times of need. The majority ofthose engaging in corrupt behavior, however, do sofor self-serving reasons, and rarely to benefit oth-ers. This fact is not lost on the majority of countriesand cultures, which decry most forms of bribery,fraud, extortion, embezzlement, and most forms ofkickbacks on public contracts (Klitgaard 1988).

In crafting an appropriate anticorruption pro-gram it does, however, seem prudent to considerthe impact of social norms and cultural traditionsand to incorporate specific strategies to deal withany particular issues that are identified. For exam-ple, in a number of small Pacific Island states wherefamilial and community links are particularlystrong, a customs IT system was introduced thatautomatically allocated declaration processing,cargo examination, and customs broker inquirieson a random basis, thus preventing any potentialembarrassment that might ensue from officialshaving to deal with members of their own linguisticor cultural group.

Box 4.10 reviews key questions regarding theplace morale has in promoting integrity.

Relationship with Private Sector

Client groups can play an important role in con-trolling corruption. After all, many forms of cor-ruption require the active involvement of externalpartners such as importers, exporters, transportproviders, and customs brokers. Therefore, aneffective anticorruption strategy will need to securethe active and wholehearted support of the busi-ness sector. Experience has shown, however, thatsuch cooperation is often difficult to obtain andeven more difficult to sustain as long as individual

BOX 4.10 Morale and Organizational Culture: Key Issues and Questions

Are staff encouraged to participate in projectteams to identify high-risk areas and suggestchanges to existing systems and work practices?

Are staff satisfaction surveys conducted? Arethe results analyzed and acted upon?

Are all breaches of integrity dealt withpromptly and investigation results made avail-able to staff and the public?

Is the administration willing to undertake aprocess of self-assessment and participate ininternational integrity activities and initiatives?

Is customs regarded as a good employer?Do customs officials take pride in working forcustoms?

Has effective whistle blower legislation beenintroduced to protect officials who report cor-rupt behavior?

Source: Based on WCO 2003b.

86 Customs Modernization Handbook

traders are willing to pay a bribe to obtain a com-mercial advantage relative to their competitors.

Customs brokers, who assist importers andexporters in working through a range of complexadministrative regulations and procedures, are usu-ally the main points of contact with customs. In theabsence of modern customs systems and proce-dures, brokers are required to work on a day-to-daybasis with customs officials. They are often the con-duits through which bribes are demanded andpaid, and added to the brokerage fees. Anecdotalevidence suggests that brokers regularly inflate theamount of the bribes paid and reimbursed by theirclients, and keep the excess for themselves. Thispractice provides brokers with a strong economicincentive to perpetuate a cycle of corruption.

The need for the business sector to take respon-sibility for its own ethics is acknowledged by theICC Rules of Conduct. Article 5 of the ICC Rulessets out the principles governing the responsibili-ties of enterprises in relation to official corruption(ICC 1999). It states that the Board of Directors orother bodies with ultimate responsibility for theenterprise should take reasonable steps, includingthe establishment and maintenance of proper sys-tems of control, aimed at preventing any pay-ments being made by or on behalf of the enter-prise that contravene the Rules of Conduct;periodically review compliance with the Rules ofConduct and establish appropriate reports for thepurpose of such review; and take appropriateaction against any director or employee contra-vening the Rules of Conduct. Directors of multi-national companies should also monitor theextent to which management ensures that,throughout the enterprise, staff adhere to theOECD anticorruption convention.

Joint customs–business anticorruption taskforces and committees could be excellent means ofachieving the desired level of cooperation and com-mitment in the fight against corruption. Such com-mittees provide an important vehicle for customsadministrations to clearly communicate the stan-dards of behavior expected of clients and for clientsto provide practical examples of the administra-tion’s most vulnerable points. They can also estab-lish practical mechanisms that encourage traders toreport customs officials who demand bribes. Clearperformance standards and client service chartersmay provide a useful starting point and a practicalmonitoring mechanism. The Indian Customs’ Cen-tral Board of Customs and Excise has established aspecial vigilance Web site to allow clients to reportcomplaints or allegations of misconduct. Eachcomplaint or allegation is directed to an appropri-ate senior manager for action, and time frames forresolution are established and monitored. Whilefunctioning as a mechanism to register complaintswith respect to customs operations, the mechanismcan be made to serve as a platform for public–private sector dialogue.

Box 4.11 presents key questions concerningintegrity and the relationship between the privatesector and customs.

Implementation of the Strategy

The WCO has developed a road map for assessingthe quality of the integrity programs employed bycustoms administrations. The WCO’s IntegrityDevelopment Guide provides an ongoing processof review and improvement of integrity strategiesand includes a component of self-assessment andaction planning.

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

Has a client service charter incorporating objec-tive performance standards been established?

Have formal cooperative agreements andpractical consultative mechanisms been estab-lished to foster open, transparent, productiverelationships with the private sector?

Has a joint customs–business task force beenestablished to address integrity issues and iden-tify practical solutions?

Has a communication strategy been devel-oped that supports the prompt provision ofinformation and promotes the achievements ofcustoms?

Are private sector operators encouraged toreport incidences of corruption? If allegationsare made, are the sources protected?

Source: Based on WCO 2003b.

Integrity in Customs 87

As a starting point it is particularly useful toundertake a comprehensive assessment of the cur-rent situation.12 Once a comprehensive diagnosticassessment has been conducted, it is then necessaryto establish priorities and agree on the content of anational integrity action plan. Priorities can beestablished based on the following criteria: impor-tance, urgency, consequence of failure, probabilityof obtaining executive and staff commitment,impact, national and international obligations, easeof implementation, and cost. Once the priority-setting process has been completed it is useful todevelop a detailed implementation plan with realis-tic time frames for implementation, responsibleofficials, and verifiable performance indicators ormeasures.

To ensure that the results of the action planningprocess are well understood and accepted by seniorexecutives and embraced by the majority of theorganization’s staff, it is important to develop prac-tical information as well as a comprehensive mar-keting strategy. The action plan must be closelymonitored to assist customs administrations inassessing and adjusting their individual integritystrategies. The action plan can best be monitoredthrough the use of performance indicators. Thesecould include the following: results of client andstakeholder satisfaction surveys, number of com-plaints or allegations against customs personnel,number of successful investigations or prosecu-tions for integrity breeches, positive or negativemedia coverage of integrity in customs, reports byinternational agencies, number and nature ofombudsman complaints, number of complaints bythe traveling public and customs brokers orimporters, results of internal and external audits,achievement of performance targets or client char-ter standards, and increases or decreases in opera-tional performance statistics.

Operational Conclusions

There is little doubt that the customs working envi-ronment makes it vulnerable to corruption. How-ever, the critically important role played by customs

requires governments and the business communityto tackle the problem in a meaningful way. Theinternational customs community has acknowl-edged the problem and has developed a range oftools and programs to deal with it in a positive andpragmatic way. The Revised Arusha Declaration onIntegrity in Customs sets out a comprehensiveapproach to dealing with the problem and has beenendorsed by the 162 members of the WCO.

In looking to implement the 10 key elements ofthe Revised Arusha Convention, experience sug-gests that a good starting point is the performanceof a comprehensive assessment of the current situa-tion. The key issues and questions contained in thischapter provide a practical guide or checklist forthis process (see boxes 4.1–4.7 and 4.9–4.11). Oncethe assessment is complete it is then helpful toestablish realistic priorities and agree on a series ofpractical objectives and activities. These then formthe basis of a national integrity action plan.Customs officials at all levels need to be involved inthe diagnostic process, the identification of priori-ties, and the development of the action plan. Theplan should outline a range of specific objectives,key activities, responsible officials, and verifiableperformance indicators or measures of success.

Customs administrations do not, however, oper-ate in a vacuum. They typically take policy andoperational direction from the government of theday and interact with a wide range of stakeholdersfrom both the public and private sectors. Muchcan therefore be gained by taking a whole-of-government approach to fighting corruption andby aligning the customs strategy with existing orfuture national anticorruption campaigns. How-ever, if this is not possible, customs must be pre-pared to act independently and decisively to controland minimize corruption.

Most corrupt transactions that occur within thecustoms environment involve the active or passiveparticipation of the private sector. The private sec-tor must, therefore, be actively involved in andcommitted to identifying and implementing prac-tical solutions.

A vitally important element of such a strategy isthe comprehensive reform and modernization ofcustoms to eliminate the incentive for private sec-tor operators to seek means of circumventing nor-mal regulatory requirements. In this sense, theRevised Kyoto Convention is one of the most

12. To assist this process, the WCO has developed a series ofdetailed diagnostic questions relating to each of the 10 elementsof the Revised Arusha Declaration. These questions are incorpo-rated in the WCO’s Integrity Development Guide, which is avail-able on the organization’s Web site www.wcoomd.org.

88 Customs Modernization Handbook

effective tools available to address corruption prob-lems in customs. Its provisions provide for less dis-cretion and greater accountability. The adoption ofan integrity strategy without modernized customsprocedures will only provide a short-term remedyand will not be sustainable in the longer term.Indeed, many senior customs officials are con-vinced that if a customs service adopts modernprocedures in line with the Revised Kyoto Conven-tion, makes effective use of IT, pays its staff a com-petitive wage, and enjoys a cooperative relationshipwith the private sector, then it has done much ofthe work required to ensure integrity.

An anticorruption strategy in customs must bedeveloped as a coherent package of mutually sus-taining measures. The motives for engaging in cor-ruption are complex; therefore, strategies should bedesigned to address both motive and opportunity.It is important to strike a balance between positivepreventive strategies and repressive ones. In anycase, customs administrations must focus on thethorough investigation of allegations of corruptionand the enforcement of penalties irrespective of theposition or influence of the individuals involved.The strategies contained in box 4.12 draw on les-sons learned from several customs reform pro-grams undertaken throughout the world, anddemonstrate the need to address both motive andopportunity for corruption through a comprehen-sive strategy.

In conclusion, the effective control and elimina-tion of corruption in customs is not an easy task.No quick fix solutions currently exist. To achievesustainable results, customs administrations needto do the following:

• obtain the wholehearted support of their gov-ernments, the business community, and a rangeof other stakeholders

• undertake a comprehensive diagnosis of theircurrent integrity problems and strategies

• collect appropriate baseline data and establishrealistic verifiable performance indicators

• develop a comprehensive integrity action planbased on each of the 10 elements of the RevisedArusha Declaration

• continually evaluate and review results andestablish an ongoing improvement process

• commit to sharing the results of their efforts• most important, assign appropriate responsibil-

ity for the administration’s anticorruption pro-gram to all managers, officials, and clients.

Further Reading

Andvig, J. C., and O. Fjeldstad. 2000. Research on Corruption:A Policy Oriented Survey. Chr Michelsen Institute andNorwegian Institute of International Affairs. Oslo. www.cmi.no/research/project.cfm?proid=272.

Hors, Irene. 2001. Fighting Corruption in Customs Administra-tion: What Can We Learn from Recent Experiences. OECD

BOX 4.12 Lessons Learned from Customs Reforms to ControlCorrupt Behavior

The primary lesson learned from customs reformin transition countries and other parts of theworld is that efforts to control the potentiallycorrupt behavior of customs officials require acomprehensive strategy to reduce the motive

and opportunity for corruption. As summarizedbelow, these lessons of experience have beenincorporated in Bank projects through the inte-grated strategy to promote integrity.

Measures Addressing Motive Measures Addressing Opportunity

• Elite ethos and esprit de corps • Lower rates, less exemption• Positive career development • Computerization• Incentives for high performance • Inspection based on risk analysis• Competitive pay and transparent • Arms-length transactions and reduction in

reward system discretionary authority• Stronger supervision and controls • Transparent clearance requirements• Sanctions for corruption • Rotation of officers• Independent appeals mechanism • Functional organization• Stakeholder surveys • Internal anticorruption strategy and audit

Source: Gill 2001.

Integrity in Customs 89

Development Centre, Technical Paper No. 175. Paris: OECD.www.oecd.org/dataoecd/60/28/1899689.pdf.

ICC (International Chamber of Commerce). 1997. InternationalCustoms Guidelines. ICC Publication No. 587 (E). New York:ICC Publishing. www.iccwbo.org

Kaufmann, D. 1999. “Economic Reforms: Necessary But NotSufficient to Curb Corruption?” In R. Stapenhurst, and S. J.Kpundeh, Curbing Corruption: Toward a Model for BuildingNational Integrity. Economic Development Institute.Washington, D.C.: World Bank.

Klitgaard, R. 1998. Controlling Corruption. Berkeley: Universityof California Press.

Sparrow, Michael. 2000. The Regulatory Craft. Washington, D.C.:Brookings Institution Press.

References

The word processed describes informally reproduced works thatmay not commonly be available through libraries.

Caiden, G. E., and N. J. Caiden. 1977. “Administrative Corrup-tion.” Public Administration Review 37(3): 301–309.

Fjeldstad, Odd-Helge, Ivar Kolstad, and Siri Lange. 2003. Auton-omy, Incentives, and Patronage: A Study in Corruption in theTanzania and Uganda Revenue Authorities. DevelopmentStudies and Human Rights. Oslo, Norway: MichelsenInstitute.

Gill, J.B.S. 2001. Customs: Developing an Integrated Anti-Corruption Strategy. World Bank Institute. Draft Mono-graph. Washington, D.C.: The World Bank.

Hors, Irene. 2001. “Fighting Corruption in Customs Adminis-tration: What Can We Learn from Recent Experiences?”OECD Development Centre Technical Paper No. 175. Paris:OECD.

ICC (International Chamber of Commerce). 1997. “Interna-tional Customs Guidelines.” ICC Publication No. 587 (E).New York: ICC Publishing.

———. 1999. Fighting Bribery: A Corporate Practices Manual.New York: ICC Publishing.

Kaufman, Daniel, Sanjay Pradhan, and Randi Ryterman. 1998.“New Frontiers in Diagnosing and Combating corruption.”PREM Note No. 7. Washington, D.C.: World Bank.

Klitgaard, R. 1988. Controlling Corruption. Berkeley: Universityof California Press.

———. 1993. “Gifts and Bribes.” In R. J. Zeckhauser, ed. Strategyand Choice. Cambridge: MIT Press.

Lane, M. H. 1998. “Customs and Corruption.” Working paper.Transparency International. Processed.

Nye, J. S. 1977. “Corruption and Political Development: A CostBenefit Analysis.” American Political Science Review LXI(2):417–427.

TI (Transparency International). 1997. TI Sourcebook—Confronting Corruption: The Elements of a National IntegritySystem. Berlin. www.transparency.org/sourcebook/.

World Bank. 2000. Helping Countries Combat Corruption. Oper-ational Core Services, Poverty Reduction and EconomicManagement Network. Washington, D.C.

———. 2001. “Cambodia Integration and CompetitivenessStudy.” International Trade Department. Prepared for theIntegrated Framework for Trade-Related Technical Assis-tance. Poverty Reduction and Economic ManagementNetwork. Washington, D.C.

———. 2003. Investment Climate Survey Database.Washington, D.C.

WCO (World Customs Organization). 2003a. Annual Survey toDetermine the Percentage of Government Revenue Provided byCustoms Duties. Document No. NC0665. Brussels.

———. 2003b. “Integrity Development Guide; Self-Assessmentand Evaluation.” Brussels.

91

5MANAGING RISK IN THE

CUSTOMS CONTEXT

David Widdowson

TABLE OF CONTENTS

The Importance of Managing Risk 92

Facilitation and Control 92

Achieving a Balanced Approach 93

Managing Compliance 93

Putting the Theory into Practice 94

Compliance Assessment and TradeFacilitation 97

Risk Management: An Example 98

Conclusion 98

References 99

LIST OF TABLES

5.1 Compliance Management Styles 95

LIST OF FIGURES

5.1 Facilitation and Control Matrix 92

5.2 Compliance Management Matrix 94

5.3 Risk-Based Compliance Management Pyramid 96

LIST OF BOXES

5.1 Managing Risk: Customs Valuation 98

In recent years the international trading environ-ment has been transformed dramatically in terms ofthe manner in which goods are carried and traded,the speed of such transactions, and the sheer vol-ume of goods now being traded around the globe.This, together with mounting pressure from theinternational trading community to minimize gov-ernment intervention, has caused customs authori-ties to place an increasing emphasis on the facilita-tion of trade.

In an effort to achieve an appropriate balancebetween trade facilitation and regulatory control,customs administrations are generally abandoningtheir traditional, routine “gateway” checks and arenow applying the principles of risk management,with varying degrees of sophistication and success.

This chapter examines the basic principles of riskmanagement and identifies practical ways of put-ting the theory into practice. The first section dis-cusses the importance of managing risk in customs.The second section examines the two key objectivesof customs—facilitation and control. The third sec-tion identifies risk management as the means ofachieving a balanced approach to facilitation andcontrol. The fourth section deals with managingcompliance and describes a risk-based compliancemanagement strategy. The fifth section concentrateson putting the theory to practice and thus drawstogether the various elements of a risk managementstyle to provide a structured approach to themanagement of compliance. The sixth section linkscompliance assessment with trade facilitation. Thenext section provides an example of risk manage-ment. The final section summarizes the chapter’smain conclusions.

David Widdowson is Chief Executive Officer, Centre for Cus-toms and Excise Studies and Adjunct Professor, School of Law,University of Canberra, Australia.

The Importance of Managing Risk

The concept of organizational risk refers to the pos-sibility of events and activities occurring that mayprevent an organization from achieving its objec-tives. Customs authorities are required to achievetwo primary objectives—provide the internationaltrading community with an appropriate level offacilitation, and ensure compliance with regulatoryrequirements. Risks facing customs include thepotential for noncompliance with customs lawssuch as licensing requirements, valuation provi-sions, rules of origin, duty exemption regimes, traderestrictions, and security regulations, as well as thepotential failure to facilitate international trade.

Customs, like any other organization, needs tomanage its risks. This requires the systematic ap-plication of management procedures designed toreduce those risks to ensure that its objectives areachieved as efficiently and effectively as possible.Such procedures include the identification, analy-sis, evaluation, treatment, monitoring, and reviewof risks that may affect the achievement of theseobjectives.

Sound risk management is fundamental to effec-tive customs operations, and it would be true to saythat all administrations apply some form of riskmanagement, either formal or informal. Drawingon intelligence, information, and experience, cus-toms has always adopted procedures designed toidentify illegal activity in an effort to reduce its risks.The more traditional procedures include physicalborder controls over the movement of goods andpeople consisting of documentary checks and phys-ical inspections aimed at detecting illicit trade. Theintroduction of such controls constitutes a form ofrisk management, but not necessarily an effective orefficient one.

Recently, the increasing complexity, speed, andvolume of international trade, fueled by the tech-nological advances that have revolutionized globaltrading practices, have significantly affected theway customs authorities carry out their responsi-bilities. As a consequence, many administrationshave implemented a more disciplined and struc-tured approach to managing risk. This has alsohelped them to increase the efficiency of their oper-ations and to streamline their processes and proce-dures, minimizing intervention in trade transac-tions and reducing the regulatory burden on thecommercial sector.

Facilitation and Control

The two key objectives of customs are commonlyreferred to as “facilitation” and “control.” In seekingto achieve an appropriate balance between tradefacilitation and regulatory control, customs mustsimultaneously manage two risks—the potentialfailure to facilitate international trade and thepotential for noncompliance with customs laws.The application of risk management principlesprovides the means of achieving this balance.

Note that the phrase “facilitation and control”has been used in this context, rather than thephrase “facilitation versus control.” It is a com-monly held belief that facilitation and control sitat opposite ends of a continuum, and it is notuncommon for commentators to refer to theapparent “paradox” of achieving both facilitationand control. It is often assumed that, as the level offacilitation increases, the level of control decreases.Similarly, where regulatory controls are tightened,it is commonly assumed that facilitation mustsuffer. This is an extremely simplistic view, as itassumes that the only way a process may be facili-tated is by loosening the reins of control. Such acontention is fundamentally flawed, because theconcepts of facilitation and control represent twodistinct variables, as depicted in the matrix infigure 5.1.

The top left quadrant of the matrix (high con-trol, low facilitation) represents a high-controlregime in which customs requirements are strin-gent, to the detriment of facilitation. This may bedescribed as the red tape approach, which is often

92 Customs Modernization Handbook

High

Low

Red TapeApproach

BalancedApproach

CrisisManagement

Approach

Laisser-FaireApproach

Con

trol

Facilitation High

FIGURE 5.1 Facilitation and Control Matrix

Source: Author.

representative of a risk-averse management style.In most modern societies such an approach is likelyto attract a great deal of public criticism and com-plaint, due to the increasing expectations of thetrading community that customs interventionshould be minimized.

The bottom left quadrant (low control, lowfacilitation) depicts the approach of an administra-tion that exercises little control and achieves equallylittle in the way of facilitation. This crisis manage-ment approach is one that benefits neither thegovernment nor the trading community.

The bottom right quadrant (low control, highfacilitation) represents an approach in which facili-tation is the order of the day, but with it comes littlein the way of customs control. This laisser-faireapproach would be an appropriate method of man-aging compliance in an idyllic world in which thetrading community complies fully without anythreat or inducement from government, becausesuch an environment would present no risk ofnoncompliance.

Finally, the top right quadrant (high control,high facilitation) represents a balanced approach toboth regulatory control and trade facilitation,resulting in high levels of both. This approach tocompliance management maximizes the benefits toboth customs and the international trading com-munity. It is this approach that administrationsshould be seeking to achieve.

Achieving a Balanced Approach

Effective application of the principles of risk man-agement is the key to achieving an appropriate bal-ance between facilitation and control. As the useof risk management becomes more effective(for example, more systematic and sophisticated),an appropriate balance between facilitation andcontrol becomes more achievable. Thus, thoseadministrations that are able to achieve high levelsof both facilitation and control (the balancedapproach quadrant of the Facilitation and ControlMatrix) do so through the effective use of riskmanagement. Similarly, administrations in a stateof total crisis management (that is, zero facilitation,zero control) would essentially be adopting a com-pliance management strategy that is devoid of riskmanagement.

However, any movement away from a state oftotal crisis management implies the existence of

some form of risk management. For example, rec-ognizing that risk is the chance of something hap-pening that will have an impact on organizationalobjectives, a regulatory strategy that achievessome degree of control, however small, represents amethod of treating potential noncompliance withcustoms laws. Equally, a strategy that achieves somedegree of facilitation represents a method oftreating the potential failure to facilitate trade. Thisrelationship is depicted in the three-dimensionalCompliance Management Matrix in figure 5.2.

Managing Compliance

The customs role is, therefore, to manage com-pliance with the law in a way that ensures thefacilitation of trade. To achieve this, manyadministrations have already implemented com-pliance management strategies that are based onthe principles of risk management.

The Compliance Management Matrix providesa useful conceptualization of the interrelationshipbetween facilitation, regulatory control, and riskmanagement. The next step is to identify the com-ponents of a risk-based compliance managementstrategy.

The underlying elements of such a strategy aresummarized in table 5.1, which compares keyelements of a risk-management style of compliancemanagement with the more traditional gatekeeperstyle, which is typically characterized by indiscrimi-nate customs intervention or a regime of 100 percentchecks. Similarly, payment of duties and other taxesis a prerequisite for customs clearance under thegatekeeper model, and such clearance is invariablywithheld until all formalities and real-time transac-tional checks are completed. A risk managementapproach, however, is characterized by the identifi-cation of potentially high-risk areas, with resourcesbeing directed toward such areas and minimal inter-vention in similarly identified low-risk areas. Suchregimes adopt strategies that break the nexusbetween physical control over goods and a trader’srevenue liability, and permit customs clearance to begranted prior to the arrival of cargo.

The various elements of each style of compliancemanagement can be broadly grouped into fourmain categories—a country’s legislative framework,the administrative framework of a country’s cus-toms organization, the type of risk management

Managing Risk in the Customs Context 93

framework adopted by a country’s customs organi-zation, and the available technological framework.Collectively, the four categories represent key deter-minants of the manner in which the movement ofcargo may be expedited across a country’s borders,and the way that customs control may be exercisedover such cargo.

An appropriate legislative framework is an essen-tial element of any regulatory regime, because theprimary role of customs is to ensure compliancewith the law. Regardless of the compliance manage-ment approach that it is supporting, the legislativeframework must provide the necessary basis in lawfor the achievement of the range of administrativeand risk management strategies that the adminis-tration has chosen to adopt. For example, an appro-priate basis in law must exist to enable customs tobreak the nexus between its physical control overinternationally traded goods and the revenue liabil-ity (that is, customs duty and other taxes) that suchgoods may attract. This does not necessarily imply,however, that such a differentiation must be explic-itly addressed in the relevant statutory provisions.For example, if the legislation itself is silent on therelationship between customs control over cargo

and revenue liability, sufficient scope is likely to existfor administratively flexible solutions to be imple-mented.

Underpinned by the relevant legal provisions, thevarious elements of the administrative and riskmanagement frameworks employed by customsessentially reflect the underlying style of compliancemanagement being pursued by the administration,with an increasing use of risk management princi-ples as the administration moves away from thetraditional, risk-averse gatekeeper style of compli-ance management to a more risk-based approach.

The available technological framework repre-sents an enabler that, while not critical to theachievement of a risk management style, serves tosignificantly enhance an administration’s ability toadopt such a style.

Putting the Theory into Practice

The Risk-Based Compliance Management Pyramid(figure 5.3) draws together the various elements ofa risk management style (that is, those on the rightside of table 5.1) to provide a structured approachto the management of compliance. It provides a

94 Customs Modernization Handbook

Control

High

Facilitation

High

Crisis Management

Low

Balanced Approach

Hig

h

Ris

k M

anag

emen

t

Red Tape Approach Laisser-Faire Approach

Source: Author.

FIGURE 5.2 Compliance Management Matrix

logical framework for demonstrating how varioustypes of risk-based strategies, including nonen-forcement strategies such as self-assessment, may beused to effectively manage compliance.

Fundamental to this approach is the need to pro-vide the commercial sector with the ability to com-ply with customs requirements. This involves estab-lishing an effective legislative base (the first tier ofthe pyramid) and an appropriate range of client

service strategies (the second tier), including effec-tive consultation arrangements and clear adminis-trative guidelines. Such strategies are necessary toprovide the commercial sector with the means toachieve certainty and clarity in assessing liabilitiesand entitlements.

At the third tier of the pyramid, the elements ofcompliance assessment come into play, includingrisk-based physical and documentary checks,

Managing Risk in the Customs Context 95

TABLE 5.1 Compliance Management Styles

Risk Management Enablers

Legislative provisions provide the trading community with electronic as well as paper-basedreporting, storage, and authentication options. Such provisions should enable regulators to relyon commercially generated data to the greatest extent possible.

Appropriate communications and information technology infrastructure to provide for automatedprocessing and clearance arrangements. Regulators should seek to achieve maximum integrationwith commercial systems.

Consultative business process reengineering prior to automation.

Source: Author.

Traditional Gatekeeper Style ↔ Risk Management Style

Legislative base provides for a “one size fits ↔ Legislative base provides for flexibility andall” approach to compliance management tailored solutions to enable relevant risk

management and administrativestrategies to be implemented

Onus for achieving regulatory compliance is ↔ Legislative base recognizes responsibilitiesplaced solely on the trading community for both government and the trading

community in achieving regulatorycompliance

Sanctions for noncompliers ↔ Sanctions for noncompliers

“One size fits all” compliance strategy ↔ Strategy dependent on level of riskControl focus ↔ Balance between regulatory control

and trade facilitationEnforcement focus ↔ Dual enforcement–client service focusUnilateral approach ↔ Consultative, cooperative approachFocus on assessing the veracity of ↔ Focus on assessing the integrity of trader

transactions systems and proceduresInflexible procedures ↔ Administrative discretionFocus on real-time intervention and ↔ Increased focus on post-transaction

compliance assessment compliance assessmentLack of or ineffective appeal mechanisms ↔ Effective appeal mechanisms

Indiscriminate intervention or 100 percent ↔ Focus on high-risk areas, with minimalcheck intervention in low-risk areas

Physical control focus ↔ Information management focusFocus on identifying noncompliance ↔ Focus on identifying both compliance and

noncompliancePost-arrival import clearance ↔ Pre-arrival import clearancePhysical control maintained pending ↔ Breaks nexus between physical control

revenue payment and revenue liabilityNo special benefits for recognized compliers ↔ Rewards for recognized compliers

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audits, and investigations. Such activities aredesigned to determine whether a trader is in com-pliance with customs law, and these are discussed inmore detail in the next section.

At the peak of the pyramid are strategies toaddress both identified noncompliers and recog-nized compliers. Strategies for the identified non-compliers include a range of enforcement tech-niques (see Ayres and Braithwaite 1992), whilestrategies for the recognized compliers includeincreased levels of self-assessment, reduced regula-tory scrutiny, less onerous reporting requirements,periodic payment arrangements, and increased lev-

els of facilitation (see Industry Panel on CustomsAudit Reforms 1995 and Sparrow 2000).

In assessing the level of compliance, customs willencounter two situations: compliance and noncom-pliance. The noncompliance spectrum will rangefrom innocent mistakes to blatant fraud. If the errornears the fraudulent end of the spectrum, someform of sanction will need to apply, includingadministrative penalties or, in more severe cases,prosecution and license revocation.

Before determining the need for, or nature of, asanction, however, it is important to identify thetrue nature of the risk by establishing why the error

96 Customs Modernization Handbook

Risk-based Procedures:

Balance between control and facilitationFocus on identifying compliance and

noncomplianceInformation management focus

Pre-arrival assessment, clearance,and release

Real-time intervention in high-risk casesPost-transaction focus in majority of casesAudits of industry systems and procedures

Investigation where noncompliancesuspected

Consultation and cooperationClear administrative guidelines

Formal rulingsEducation and awareness

Technical assistance and adviceAppeal mechanisms

Client Service

Legislative Base

ComplianceAssessment

Enforcement/Recognition

Enforce noncomplianceusing administrative

discretion

Reward complianceusing administrativediscretion

Simplified proceduresIncreased self-assessmentIntervention by exceptionReduced regulatory scrutinyPeriodic payment arrangementsLess onerous reporting requirements

Modification of Ayresand Braithwaite (1992)Enforcement Pyramid

Formal Warning

Persuasion

Penalty

Recognizes respective responsibilitiesof government and industry

Provides for electronic communicationEstablishes sanctions for noncompliersEnables flexibility and tailored solutions

Breaks nexus between goods andrevenue liability

FIGURE 5.3 Risk-Based Compliance Management Pyramid

Source: Author.

has occurred. For example, the error may be theresult of a control problem within the company dueto flawed systems and procedures, or it may be theresult of a deliberate attempt to defraud. It also maybe that the relevant legislation is unclear or theadministrative requirements are ambiguous. Thetype of mitigation strategy that customs shouldemploy to ensure future compliance will depend onthe nature of the identified risk. Unless the error isfound to be intentional, it may be appropriate toaddress systemic problems within the company, orto provide the company (or perhaps an entireindustry sector) with advice on compliance issues,or provide formal clarification of the law throughbinding rulings or other means (Widdowson 1998).

In this regard, it is important to recognize thatdifferent solutions will be required to address hon-est mistakes on the one hand, and deliberateattempts to evade duty on the other. For example,industry familiarization seminars and informationbrochures may adequately address errors that resultfrom a lack of understanding of the relevant regula-tory provisions. However, if someone is activelyseeking to commit revenue fraud, seminars andinformation brochures will have absolutely noimpact on their activities. Indeed, such members ofthe trading community are likely to have an excel-lent understanding of their obligations and entitle-ments. To treat the risks posed by such individuals(or organizations, for that matter), a rigorousenforcement approach is likely to be required.

Compliance Assessment and Trade Facilitation

In applying the principles of risk management tothe day-to-day activities of customs, one of the mostcritical areas is that of compliance assessment—determining whether an entity or transaction is incompliance with regulatory requirements. This rep-resents the third tier of the Compliance Manage-ment Pyramid in figure 5.3. When developingstrategies to assess compliance, it is important toconsider a key principle of the Revised Kyoto Con-vention—that customs control should be limited towhat is necessary to ensure compliance with thecustoms law (WCO 1999). Administrative regimesshould be as simple as practicable, and should pro-vide the trading community with cost-efficientways of demonstrating compliance with the law.

This principle applies to a range of customs con-trols, including physical control over goods, infor-mation requirements, timing and method ofreporting, and timing and form of revenue collec-tion. The use of documentary controls (informa-tion management) to monitor and assess compli-ance generally represents a far less intrusive andhence more facilitative approach than the use ofphysical controls. Similarly, post-transaction auditgenerally represents a more facilitative method ofverification than checks undertaken at the time ofimportation or exportation.

For many developing countries, however, thetask of introducing risk-based strategies can bedaunting, particularly for those administrationsthat do not yet have the capacity to undertake post-transaction audits, or that currently rely heavily onmanual processing systems. While it is clear thatsuch impediments will limit the effectiveness of anyrisk-based strategies, applying a risk managementapproach to existing manual systems will prove farmore effective and efficient than continuing toapply a gatekeeper approach to those same systems.For example, despite the fact that an administrationmay undertake all customs examinations andassessments at the time of importation, there is nev-ertheless an opportunity to replace an indiscrimi-nate or random method of examining goods withone that takes account of the potential risks. Simi-larly, it is quite possible to apply documentarychecks prior to the arrival of goods despite the factthat manual methods of processing are employed.

A case in point is Sri Lanka, which was successfulin introducing pre-arrival screening and clearancefor air express consignments prior to the availabilityof its automated systems. This consisted of a combi-nation of manual documentary assessment, selec-tive examination, and the establishment of x-rayfacilities to address the potential risk of misdescrip-tion. Consolidated manifests were manually sub-mitted to customs prior to aircraft arrival, togetherwith advance copies of air waybills and invoices.These were manually screened by customs to iden-tify potentially high-risk shipments (based on intel-ligence, emerging trends, the previous compliancerecord of consignees and consignors, and so on).Any consignments that were considered to be highrisk were identified for further examination uponarrival, together with certain dutiable and restrictedgoods that were held pending formal clearance. All

Managing Risk in the Customs Context 97

other consignments (that is, low-risk shipments)were available for delivery on arrival.

Administrations that have adopted a risk-basedapproach to compliance management, regardless ofwhether their systems are automated, are also selec-tive in their use of the broad range of controls thatare available to them. In being selective, they recog-nize that individual members of the trading com-munity present customs with varying levels of riskin terms of potential noncompliance with relevantlaws. For example, traders with a good record ofcompliance are unlikely to require the same level ofscrutiny as those with a history of poor compliance.Consequently, if a trader is judged to be relativelylow risk, customs may reduce its level of regulatoryscrutiny and place greater reliance on the company’sself-assessment of compliance.1 This particularlyeffective strategy is a commonly used method ofrecognition, and forms the right half of the peak ofthe Compliance Management Pyramid.

Risk-based compliance management results in asituation where low-risk traders are permitted to

operate under less onerous regulatory requirementsand may anticipate little in the way of customsintervention, and therefore receive relatively highlevels of trade facilitation. Transactions of high-risktraders, however, are more likely to be selected forhigher levels of customs intervention and control.Customs intervention for high-risk traders mayinclude documentary checks or physical examina-tions at the time of importation or exportation,higher levels of audit activity, physical controls atmanufacturing premises, and relatively high secu-rity bonds. In all cases, however, the level and typeof intervention should be based on the level of iden-tified risk.

Risk Management: An Example

Sometimes confusion arises over the terms used todescribe the management of risk, and often termsare used interchangeably. The simple scenario inbox 5.1 of a country that recently accepted the WTOobligation on valuation is designed to clarify themore common terms.

Conclusion

Effective risk management is central to modern cus-toms operations, and provides the means to achievean appropriate balance between trade facilitation

98 Customs Modernization Handbook

BOX 5.1 Managing Risk: Customs Valuation

Following its adoption of the WTO ValuationAgreement, customs needs to ensure thatimporters comply with the new provisions. Itstask is therefore one of compliance management.To effectively manage compliance, it decides tofollow the principles of risk management, whichrequire it to identify, analyze, evaluate, and treatrisks to the achievement of its objectives. In thiscase, the overriding risk is that traders fail tocomply with the valuation provisions.

To accurately identify the risk, customs consid-ers in further detail what could happen that mayresult in incorrect valuation, and how such anevent could occur. One such risk is undervalua-tion due to certain traders deliberately failing todeclare the cost of assists (includes materials,tooling, or other costs provided by an importerto a foreign producer). Customs then analyzesthe risk by determining the likelihood of it occur-ring and the consequence if it was to occur. Itsnext step is to evaluate the risk by determining

whether it is an acceptable risk—that is, doescustoms need to do anything about it? (Someprefer to use the term risk assessment in lieu ofrisk evaluation. Others use the term risk assess-ment to describe the combined process of riskanalysis and risk evaluation.)

Customs decides to treat the risk, and deter-mines that the best way is to target shipmentsthat are likely to include undeclared assists.Based on its research, customs identifies a num-ber of criteria or risk indicators (for example, typeof goods, supplier, consignee, origin) that, col-lectively, are likely to indicate a potential nonde-claration of assists. When combined, these indi-cators represent a risk profile that customs usesto select suspected high-risk consignments. Suchselectivity ensures that low-risk consignments arefacilitated.

Source: Author.

1. Allowing low-risk traders to self-assess their revenue liabilitydoes not imply that no customs checks will be made. It does,however, imply that a decision to clear the goods will generally bemade on the basis of the traders’ own assessment of their liabilityor entitlement.

and regulatory control. The principles of riskmanagement can be applied by all administrations,regardless of whether they operate manual orautomated systems, if they adopt strategies thatincorporate the key elements of a risk-basedapproach to compliance management.

To manage risk effectively, administrations mustgain a clear understanding of the nature of risks tothe achievement of their objectives and devisepractical methods of mitigating those risks. Finally,there needs to be a demonstrated commitmentfrom the highest level of the organization to supportthe transition to a risk-based approach to compli-ance management.

References

Ayres, Ian, and John Braithwaite. 1992. Responsive Regulation:Transcending the Deregulation Debate. New York: OxfordUniversity Press.

Industry Panel on Customs Audit Reforms. 1995. Looking to theFuture—Compliance Improvement, Report of the IndustryPanel on Customs Audit Reforms. Canberra: Australian Cus-toms Service.

Sparrow, Malcolm. 2000. The Regulatory Craft. Washington, D.C.:Brookings Institution Press.

Widdowson, David. 1998. “Managing Compliance: More Carrot,Less Stick.” In Chris Evans and Abe Greenbaum, eds. TaxAdministration: Facing the Challenges of the Future. Sydney:Prospect.

World Customs Organization. 1999. International Convention onthe Harmonization and Simplification of Customs Procedures(as amended), General Annex, Standard 6.2. Brussels.

Managing Risk in the Customs Context 99

101

Part II

Lessons from aSelect Set of

Customs ReformInitiatives

103

6POLICY AND OPERATIONAL

LESSONS LEARNED FROMEIGHT COUNTRY CASE STUDIES

Paul Duran and José B. Sokol

TABLE OF CONTENTS

Main Characteristics of the Countries Case Study 105

Customs Reform Experiences 108

Components of Customs Reforms 111

Outcomes of the Reform Programs 119

Lessons Learned 124

Further Reading 126

References 126

LIST OF TABLES

6.1 Basic Economic Data, 2000 106

6.2 Revenue Performance Before and AfterCustoms Reforms 106

6.3 Revenue Performance Before and AfterCustoms Reforms 120

6.4 Customs Processing Times 121

LIST OF BOXES

6.1 Implementation of Customs Reform inMozambique 109

6.2 Information Technology in Turkey 115

6.3 Import Verification in Peru 117

6.4 Customs Cooperation with the Private Sectorin Morocco andthe Philippines 123

6.5 Addressing Corruption in Uganda’sIndependent Revenue Authority 124

The focus of this chapter is the customs reformand modernization programs in eight developingcountries—Bolivia, Ghana, Morocco, Mozambique,Peru, the Philippines, Turkey, and Uganda1—with aview to drawing lessons that could be useful in for-mulating reform programs for other countries. The

country case studies were assigned to customsexperts and consultants who either participated inthe reform processes in the countries reviewed orwho, in their professional experience, had accumu-lated significant technical knowledge of customsreform and modernization processes in a worldwidecontext.

Countries were selected that would present ini-tiatives from different continents, with their respec-tive special reform outlooks, and that would yieldinteresting insights.

Initiated within the framework of an institu-tional reform covering the entire government and

1. The country case studies were performed by the followingconsultants: Bolivia (Flavio Escobar), Morocco (Marcel Steen-landt and Luc De Wulf), Mozambique (Anthony Mwangi), Peru(Adrien Goorman), the Philippines (Guillermo L. Parayno Jr.),Turkey (M. Bahri Oktem), and Uganda (Luc De Wulf). TheGhana report (Luc De Wulf) was commissioned by the WorldDevelopment Report team of the World Bank.

with strong leadership provided by the vice presi-dent, customs reform in Bolivia aimed at its totaltransformation. One of the key elements of thereform was complete staff renewal designed to ridthe service of deeply embedded corruption.

The study of the Ghana experience is quite dif-ferent from the other country studies. It was under-taken initially as a case study of reform that wouldimprove the investment climate. It clearly illustrateshow introducing information technology (IT)—even in the absence of a comprehensive customsreform—can strengthen revenue mobilization andspeed up the clearance of cargo.

While not codified in a detailed action plan,Morocco’s program of customs reform and mod-ernization reflected a comprehensive vision andcovered all aspects of customs from its organizationto its operation. Reform actions were undertaken ina deliberate and pragmatic process.

In Mozambique, the most significant character-istic of the reform was the willingness to rely exten-sively on external consultants for management andimplementation of the reform, and for the valua-tion of imports and exports for customs purposes.This unusual approach was adopted in the midst ofrebuilding a government service that was totallydestroyed after many years of war.

In Peru, customs reform and modernizationwas high on the agenda of the president, who pro-vided strong political support throughout thereform process. Customs was vested with full own-ership, and maintained the necessary continuity tosee the process through to its completion.

Decisive factors in the success of the reform inthe Philippines during 1992–98 included strongtop-level political backing; strong, able, and sus-tained operational leadership; ownership of thereform by the head of customs; and support thatincluded some funding by private sector users ofcustoms services. Among its weaknesses was a fail-ure of commitment from the staff arising in partfrom inadequate compensation—a problem thatcould not be addressed because the PhilippineBureau of Customs lacked authority and funding.

Customs reform and modernization efforts inTurkey were dominated by two goals: bringing cus-toms legislation and administrative structures inline with European Union (EU) standards in thecontext of a customs union with the EU, and theautomation of customs procedures. The establish-

ment of an independent Modernization ProjectUnit with strong political support and steady man-agement was a critical element in the effective coor-dination of automation activities.

In Uganda, customs reform has been a long-term process. Started in 1990–91, its main aim wasto strengthen revenue mobilization and to combatcorruption.

In addition to the experiences of the countrystudies, reference is occasionally made to the expe-riences of interesting customs reform and modern-ization processes in countries of SoutheasternEurope,2 where the Bank supported border infra-structure and institutional modernization to facili-tate legitimate trade and fight smuggling and cor-ruption. Such efforts address customs reform fromthe perspective of the end-user—the tradingcommunity—and cover a broad spectrum of activ-ities, including interagency cooperation, enforce-ment, private sector relations, infrastructure reha-bilitation, and revenue collection. Corruptionissues are addressed through procedural and orga-nizational reforms.

The country case studies were undertaken basedon a common approach to ensure comprehensive-ness and comparability. Five areas of the reformprocess were targeted:

• The background of the reform and moderniza-tion process, its economic and institutional con-text, factors leading to reform decisions, sup-porters, objectives and design, and financial andtechnical support.

• Issues in the reform process.• The reform measures themselves, covering

legislation; management changes; staff-relatedquestions such as pay, selection, training,integrity, and corruption; information technol-ogy; valuation; experience with preshipmentinspection; special import regimes; and selectiv-ity in pre- and post-release control.

• Reform outcomes including impact on fiscalperformance, trade facilitation, anticorruption,staffing and workload, and conformance to inter-national standards. Where available, quantitative

104 Customs Modernization Handbook

2. The Trade and Transport Facilitation in Southeast EuropeProgram (TTFSE) is an integrated approach to customs andborder management issues, involving eight countries (Albania,Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia,Moldova, Romania, and Serbia and Montenegro).

performance indicators receive attention as douser reactions.

• The lessons that each of these studies containand the judgment pertaining to the sustainabil-ity of these modernization initiatives.

Reform and modernization in the case studycountries aimed at transforming customs into aprofessional administration. Whereas most coun-tries pursued several objectives encompassing facil-itating trade, raising revenue, and protecting theeconomy against harmful practices, in others thescope was more limited with emphasis on a partic-ular area. In all cases, reform efforts were supportedby external technical and financial assistance.

To provide a firm foundation to the reformprocess, most countries adopted a new CustomsCode, adapting legal provisions to the needs ofinternational trade practices and the applicationof IT. The reform of customs services includedchanges in the structure, organization, or status ofcustoms administrations. In several countries, cus-toms was given administrative autonomy, whichprovided flexibility in adopting a structure and indeveloping procedures most suited to dischargingits tasks. In a few countries, customs also obtainedfinancial autonomy.

To distill the experiences of the countriesreviewed into usable lessons, this chapter is organ-ized as follows: The first section provides back-ground information on the economic perform-ance, economic policies, and reforms, relativesize, and degree of integration of the countriesreviewed. The second section gives an indication ofthe principal reform objectives, their main designfeatures, and the donor financial and technicalassistance that supported them. The third sectioncontains a detailed review of the reform compo-nents, covering the Customs Code, managementchanges, personnel issues (including integrity), IT,customs control, and measures for trade facilitationand for safeguarding revenues. The fourth sectionevaluates the outcome of the reforms, assessingtheir impact on customs in the areas of revenuegeneration, enforcement, integrity, customs clear-ance time, and the reaction of users of customs’services. Finally, the fifth section derives the lessonsof country experiences and identifies factors thatare critical for designing and undertaking success-ful reform programs.

Main Characteristics of theCountries Case Study

The design, enactment, and implementation ofmajor customs reforms in the countries reviewedwere influenced by concerns within the countriesfor improving economic management and increas-ing the incomes of their population, ongoing eco-nomic reform efforts, and the possibility ofexpanding trade links with other countries.

Economic and Population Characteristics

Wide differences were recorded in the countriesreviewed in terms of the size of their economies,population, level of development, and recent eco-nomic performance (see table 6.1). Yet these factorsdid not influence any country’s commitment toreform or its pace. Gross domestic product (GDP)levels range from close to US$200 billion for Turkeyto less than US$4 billion for Mozambique. With77 million inhabitants, the Philippines has thelargest population of all eight countries reviewed,followed by Turkey with 65 million. Bolivia is thesmallest of the group with 8 million inhabitants.

In terms of GDP per capita, Mozambique lies atthe lower end of all countries reviewed with US$216,Turkey at the highest end with US$3,052. A widevariance of growth rates was also recorded. In somecountries, the reforms contributed to higher growthrates during 1996–2001 than those achieved during1990–95. Mozambique grew at 9.0 percent per yearon average, followed by Uganda at 5.8 percent, andMorocco at 4.1 percent. Peru and Turkey had thelowest growth rates of all, at 2.2 percent.

Fiscal Performance

Reliance on import taxes3 as a source of revenuewas relatively higher for most countries prior to theintroduction of the reforms (see table 6.2), withimport taxes as a share of tax revenue amounting tomore than 30 percent in five countries and around20 percent in two. Customs duties as a share of tax

Policy and Operational Lessons Learned from Eight Country Case Studies 105

3. Customs revenue is the sum of import values multiplied bytax rates applicable to imports, less tax exemptions (some man-dated by international agreements, others by local legislation, forexample, certain sectors, new investment, or other). Revenuechanges when either tax rates or import values change. The lat-ter changes because of changes in GDP, import prices, institu-tional valuation capacity, and contraband volumes.

revenue lies between about 4 percent and 27 per-cent. The tax-revenue-to-GDP ratio is in the rangeof about 8 percent to 22 percent.

At the outset of the reforms, tax revenue wasrather low as illustrated by tax-to-GDP ratios ofless than 10 percent in Uganda and Mozambique,and in the low to mid-teens in Peru, Bolivia, the

Philippines, and Turkey (table 6.2). Following thereform, the tax-revenue-to-GDP ratio increased inall countries, except the Philippines. Moreover,import taxes became an important tax handle inmost countries.

During the period from the outset of the reformsthrough 2001, the import-tax-to-tax-revenue ratio

106 Customs Modernization Handbook

TABLE 6.1 Basic Economic Data, 2000

TABLE 6.2 Revenue Performance Before and After Customs Reforms

GDP Growth

GDP Population GDP per Capita(Annual average in percent)

Country (Millions of US$) (Millions) (US$) 1990–95 1996–2001

Bolivia 8,356 8 1,003 4.2 3.1Ghana 4,977 19 340 4.3 4.2Morocco 33,345 29 1,162 1.6 4.1Mozambique 3,813 18 216 3.1 9.0Peru 53,466 26 2,061 3.8 2.2Philippines 74,733 77 975 2.8 3.5Turkey 199,267 65 3,052 4.3 2.2Uganda 5,891 22 265 7.0 5.8

Source: World Bank data.

Bolivia Ghanaa Morocco Mozambique Peru Philippines Turkey Uganda

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

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

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

rose sharply in a number of countries (to 34 percentin Uganda, 45 percent in Mozambique, and 37 per-cent in Peru) owing to the introduction of the valueadded tax (VAT). The fall of this ratio in othercountries (to 34 percent in Bolivia and 21 percent inthe Philippines) reflected the sharp drop of customsduties in tax revenue, resulting from customs dutyrate cuts.

Overall Reform Context

In several countries, the implementation of cus-toms reforms was coordinated with trade liberal-ization policies, themselves often part of a broadereconomic reform program. Between 1988 and1991, Bolivia reduced its general import tariff ratefrom 20 percent to 5 percent on capital goods and10 percent on other goods. In Peru, the averagenominal tariff declined from 46.5 percent in 1990to 13.5 percent in 1997 and 11 percent in 2000. Theacceleration of trade reform in the Philippinesreflected the country’s compliance with commit-ments under the World Trade Organization(WTO), and the regional groups Asia-Pacific Eco-nomic Cooperation (APEC) and Asian Free TradeAssociation (AFTA). Uganda moved to twononzero rates of 7 percent and 15 percent in 1995.In Mozambique, the average tariff rate declinedfrom 15.7 percent in 1998 to 13.0 percent in 2001.

In Bolivia, Peru, and Turkey, customs reformsformed part of a broad program of policy and insti-tutional reform that covered other governmentunits or even the whole administration. Reformwas either directed at the general structure of gov-ernment or focused on specific aspects, such as per-sonnel management. In Bolivia, personnel manage-ment reform was part of an administration-widecivil service reform, with customs selected as theinitial reform area. Other aspects of the reformtouching on the administrative structure of cus-toms were also part of the administration-widereform program, including contraband control.4

In 1990, Peru carried out a complete overhaul ofthe central government and all public institutions,including customs. In Turkey, customs reform waspart of the reform requirements for membership inthe customs union with the EU. The reorganizationof customs was also an integral element of Turkey’sgovernment-wide administrative reform.

In Morocco, customs modernization wasdirected at enhancing the country’s external com-petitiveness, a clearly perceived necessary conditionto fulfill the country’s ambition of fuller integrationof its economy into the world economy, as reflectedin its broader commitments under the WTO andthe association agreement with the EU. In South-east Europe, customs reform under the TTFSE pro-gram was designed to combat corruption andsmuggling, and improve border processing anddecrease delays. The ultimate objective was toachieve compatibility with EU standards, thus facil-itating the accession process. In Mozambique, cus-toms reform became part of the government’s effortto reconstruct its war-torn economy and resultingtotal lack of effective administrative capacity.

In Mozambique, Morocco, the Philippines, andUganda,5 customs was the single targeted institu-tion for reform. In Ghana, customs modernizationwas part of the government trade policy reformsbeing enacted to implement the government visionfor a Ghana that is open to the rest of the world.

Regional and Preferential Arrangements

All case study countries are members of one or moreregional or bilateral preferential arrangements in theform of a customs union or full-fledged or partialfree trade arrangement. In some countries, mem-bership in a regional arrangement has been a posi-tive factor providing an impetus for customs reformeither through the adoption of modern regulationsas in the case of Turkey, or of best practices jointlywith other countries, such as the Philippines inAPEC or Southeast European countries in the EU.

The management of effective transit traderequires good cooperation between the variouscountries affected. A regional approach to this

Policy and Operational Lessons Learned from Eight Country Case Studies 107

4. To control contraband, most customs administrations have apolice-like law enforcement unit. Some countries delegate thisfunction to law enforcement agencies, such as the general policeforce or special border police (Chile and Argentina, for exam-ple). The control of contraband poses many complex issues,including determining the best arrangements to address it, theoptimal number of personnel to be assigned to the task in rela-tion to import volume and kilometers of borders, and so forth,which are beyond the scope of this review.

5. In Uganda, the reform created an Autonomous RevenueAgency (ARA) that encompasses Customs and Domestic Taxa-tion as two separate departments.

matter has many advantages. For example, Mozam-bique is a member of the Cross-Border Initiative(CBI) and Southern African Development Com-munity (SADC), both of which provide for freetrade among members except for raw materials.Mozambique has entered into several bilateral pref-erential trade agreements, especially with Africancountries, and trade protocols governing transittrade. Turkey has signed free trade agreements withthe European Free Trade Association (EFTA) and anumber of central and eastern European countriessimilar to EU agreements with those countries. InSoutheast Europe, the reintroduction of the Trans-port International Routier (TIR) regime across Ser-bia was a key element of trade facilitation.

A problem in the implementation of the Com-mon Market for Eastern and Southern Africa(COMESA) in Uganda is a result of the incidence offraud in the certificates of origin and the low levelof effective cooperation of customs authorities inthe various countries that substantially increasesthe cost of transit. Ongoing discussions with Kenyaand Tanzania to revive the East African Commu-nity could help alleviate problems for Uganda’simporters at the Kenyan and Tanzanian borders.

Customs Reform Experiences

Before undertaking the reforms reviewed here, cus-toms administrations in the sample countriesshared a number of weaknesses. In general, clear-ance procedures were tedious and costly in terms ofrequired documentation and procedures, resultingin lengthy clearance times. Clearance proceduresoften included redundant verifications and multi-ple steps that lacked business rationale and whoseobjectives were overtaken by modern businesspractices. Also, in most cases all shipments weresubject to physical inspection, and procedures werelargely paper-based and inadequately supported bycustoms IT. In several countries (Bolivia, Mozam-bique, the Philippines, and Uganda) corruptionand smuggling were major problems. In SoutheastEurope, as in most transition countries, the situa-tion was further complicated by the need to movecustoms from its traditional role in a socialist envi-ronment of statistical regulation and passengercontrol to a more trade-oriented activity. This was aserious challenge, as the administrations had tocope, in a very short time, with a rapidly expanding

private sector. The latter consisted of often unreli-able or unknown operators and the customsadministrations did not have the resources, organi-zation, or training to manage that fundamentalchange. In Ghana, customs clearance procedureswere time consuming, error prone, and did notprovide a transparent method to audit whether, infact, all cargo had been declared.

Customs Reform Objectives

The main reform objectives included strengthen-ing revenue-generating capacity, enhancing tradefacilitation, and combating smuggling and cor-ruption. Most countries pursued several objec-tives, although in some the initial emphasis on oneobjective shifted during the reform process assufficient progress was achieved and its urgencydeclined. Among the factors determining thechoice of objectives were the initial state of customsservices and the economic policy objectives of thegovernment, especially in the fiscal and trade policyareas.

In countries with a comprehensive reformprogram, the objective was to set up a fully profes-sional, efficient, and integrated administration,which would become an effective instrument offiscal and trade policies by ensuring proper revenuecollection, minimizing trade costs, and protectingthe economy from harmful practices. These werethe broad reform objectives instituted in Mozam-bique, Morocco, Peru, and the Philippines. While atthe beginning of the reform process the primaryobjective in the Philippines may have been revenuegeneration, improving trade facilitation and thebusiness and investment environment by stream-lining the customs bureaucracy gained prominencein the reform. In Turkey, the aim of the reform wasto enhance trade facilitation and contribute toTurkey’s integration into the European Commu-nity (EC). This was also the case in SoutheastEurope. In Uganda, the reform focused primarilyon increasing government revenue and combatingcorruption, with less emphasis on trade facilitation.

In Peru and the Philippines, the reform wastriggered by declining or stagnating governmentrevenues. The revenue-related problems becameparticularly severe in Peru, which was then facingan economic crisis, and in the Philippines, wherethere were serious revenue leakages. In other cases

108 Customs Modernization Handbook

the severity of corruption was the main driver forreform (in Bolivia), or a strong contributing factorto the decision to reform (in Mozambique, thePhilippines, and Uganda). In some countries,broader institutional changes or external require-ments led to customs reform, such as the economicprograms supported by the International Monetary

Fund (IMF) and the World Bank in Mozambique(see box 6.1). Easing constraints on trade imposedby customs led representatives of the trading com-munity to place trade facilitation high on theagenda of the customs reform in Morocco and inTurkey. In Ghana the customs modernizationprocess arose because of lagging foreign direct

Policy and Operational Lessons Learned from Eight Country Case Studies 109

BOX 6.1 Implementation of Customs Reform in Mozambique

Faced with the run down state of customs theMozambican authorities chose to enter into amanaging contract with an outside agency torebuild its customs department. The authoritieswere fully aware that it would be difficult tobreak out of the grip of firmly entrenched smug-gling rings from within. Under these circum-stances, and with a view to supplementing theshortage of domestic experienced staff, theTechnical Unit for Restructuring Customs (UTRA)invited external service providers to managecustoms and implement key parts of the cus-toms reform process initiated in 1995. The out-side agency had both short-term objectivesaimed at increasing recurrent revenue collec-tion, and long-term goals focused on capacitybuilding. The outside agency’s major assign-ment was to take over the complete manage-ment of customs, including training, appointingkey customs officials to perform the contractedfunctions, supervising external trade operationssubject to customs legislation, preventing fraudand evasion of taxes, and procuring and main-taining equipment assigned to the reform proj-ect, such as data processing software and hard-ware. However, the authorities went into thesearrangements with a gradual approach.

Through an international bidding process,Crown Agents (CA) was awarded a three-yearcontract covering 1997–99. Operational man-agement began in May 1997 following agree-ment on proposed work plans for each of theareas to be implemented during the contract. Asenior consultant of CA was appointed Dele-gated Manager of Customs. The process ofchange management implemented by CA wasoverseen by a steering committee made up ofrepresentatives of UTRA, IMF, World Bank, andthe Department for International Development(DFID), which was supporting the project withfinancial and technical assistance. In addition,there were annual reviews of progress to meas-ure the project against original objectives. How-ever, the envisaged timetable for phasing outthe contribution to be made by CA proved opti-mistic, in part because the original assumptions

of the project, such as those related to revenuegains and expected staff replacement needs,were too aggressive. By the end of the contractsome of the anticipated outcomes had not beenachieved, as the newly appointed Mozambicansenior managers were not ready to assume theirfull managerial responsibilities. Also, some of theoperational procedures and information systemswere not sufficiently established.

Following a comprehensive contract compli-ance review carried out by DFID, the govern-ment approved an initial six-month contractextension, followed by a further contract ofthree years through mid-2003 to consolidate thereform. During the extension, the role of CAchanged from execution to supervision andmentoring, except in the areas of intelligence,staff irregularities, audit, and anticorruption. CAwas to advance the improvements made in cus-toms services and introduce the necessary sys-tems and procedures. The number of CA con-sultants was to be reduced from 47 in mid-2000to 11 in mid-2003. Since then, a further exten-sion through mid-2005 was agreed on, as moretime was needed for the handover of responsi-bilities to senior managers. Despite limitedprogress in reducing corruption and a furtherneed to tackle smuggling on a sustainable basis,the role of CA is generally seen as beneficial inimplementing customs reform and reorganiza-tion. The test of the overall success of engagingan external manager will be provided by the sus-tainability of customs operations carried out by adomestically run agency once CA’s interventionis fully phased out.

The above experience underlines the impor-tance of having both a full diagnostic as well asa detailed feasibility study of the managementtasks entrusted to an outside agency before acontract is agreed on. This would reduce thepossible need for repeated extensions, while asomewhat more flexible contract length couldbe useful for tasks related to capacity building.

Source: Mwangi 2004.

investment despite the fact that much of the policyreforms had been accomplished. In all cases, tradefacilitation initiatives were subjected to the require-ment that the role of customs in revenue genera-tion was not to be undermined.

Sponsorship and Political Backing

The impetus for the reform differed across coun-tries. In several countries it originated from thehighest authorities, which in some cases providedstrong and sustained political backing. In Peru andthe Philippines, the reforms were direct initiativesof the presidents, who protected the reform and itsleadership against political and administrativeobstacles. In Bolivia, the leadership of the institu-tional reform program covering customs wasvested in the vice president. In Morocco, supportmeasures for foreign trade, including improvingcustoms, had been called for by the late KingHassan II and demanded by the trading commu-nity; the reforms benefited from strong supportfrom the King. In Uganda, the main reform spon-sor was the Minister of Finance (MOF), while theState Minister for Customs played the leading rolein spearheading the reform in Turkey. In Ghana,the reform drive benefited from the strong personalsupport of the Minister of Trade, while the MOFsupported it because of the prospects it offered tostrengthen the Customs Service and raise largerbudget revenues.

Design

In Bolivia, Peru, the Philippines, and Turkey, thereforms were part of a comprehensive master planthat covered all aspects of customs operations andadministration, including the overhaul of systemsand procedures, in-depth reform of services withupgrading and redeployment of staff, automationof the clearing process, post-release control andaudit processes, and extensive IT use. In othercountries the approach was pragmatic, movingforward with successive measures with either fullor limited coverage of reform components. InMorocco, the reform was not contained in a masterplan, but proceeded on the basis of a pragmaticapproach with measures that were implemented ina piecemeal fashion, building upon successesachieved. In Southeast Europe, the customs reformpackage was totally integrated in a trade facilitation

objective supported by numerous external organi-zations (EU, Stability Pact, South East CooperationInitiative). It resulted in a comprehensive projectdesign. It included the private sector and involvedother agencies operating in the border areas. InGhana, the reforms were driven by a vision of con-verting Ghana into a gateway for West Africa to therest of the world.

In some countries the reform entailed providinggreater operational autonomy to customs. InUganda, the reform centered on the activities of theindependent Uganda Revenue Authorty (URA),which was created in 1991 and endowed with sub-stantial management flexibility to improve staffquality, compensation, and discipline. In Peru,SUNAT (the merged Inland Revenue and CustomsAdministration agency) focused on effective man-agement of human, budgetary, and physicalresources; and the introduction and implementa-tion of modern administrative and control proce-dures and systems. In Turkey, the customs modern-ization project was directed at harmonizingprocedures and regulations in line with those ineffect in the EU, and at upgrading computer supportfor customs operations to enhance overall efficiency.

There were notable differences among countriesin the design and implementation of the reforms.In Morocco, Peru, and the Philippines, the reformswere under full control of the customs administra-tion. In other countries special units were set up toformulate and implement the reform, for example,the Technical Unit for Restructuring Customs(UTRA) in Mozambique. In Bolivia, the reformprogram was conceived by a group of high-rankingofficials, including the Minister of the Treasury, butimplemented by customs. In Southeast Europe, aRegional Steering Committee that comprised aNational Coordinator per country further super-vised the reform process. Each National Coordina-tor (usually the MOF or the Director General ofCustoms) was nominated by the government torepresent all the agencies and bodies involved incross-border trade.

The customs reforms were usually carried outover several years. In most countries a frontloadingof major institutional changes was followed by aperiod of consolidation during which the changeswere fully absorbed and their implementation care-fully monitored, while accompanied by furtherreforms, as in Peru. In others, reforms were moregradual and phased in over time, as in Mozambique,

110 Customs Modernization Handbook

where a major overhaul of customs staff wasundertaken.

Donor Assistance

All reforms in the country case studies were sup-ported by external assistance, but the scope of thisassistance varied substantially across countries. Inall countries except Uganda and Peru, the IMF andthe World Bank provided technical assistance,advising on certain aspects or on overall reformrequirements. In Turkey and the Philippines, WorldBank support focused on IT and automation ofprocedures, in addition to advice on the wholereform process. In Turkey, World Bank financingcovered the costs of automation studies, theirimplementation, and equipment acquisition. TheIMF supported the reform initiative by posting aresident adviser in the organizational structure ofcustoms in 1996–97 and by assisting in the selec-tion and supervision of an IT adviser for the WorldBank–financed project in 1997–99. In the Philip-pines, the World Bank financed the services ofUNCTAD (United Nations Conference on Tradeand Development) for the implementation of thenew customs information systems (ASYCUDA++)and of the computer hardware. In addition, theIMF proposed an 11-point action program forreform in 1991, which was followed up by postingtwo resident advisers. In Southeast Europe, theTTFSE projects were cofinanced by the Bank andthe United States, with the Bank funding the infra-structure and IT components, and U.S. Customsproviding technical assistance. In Ghana, customsmodernization formed part of World Bank supportfor the Ghana Gateway Project.

In Mozambique, the World Bank providedfinancing for UTRA while the IMF provided a legalspecialist. Mozambique also received significantgrant support from the United Kingdom’s DFIDfor engaging Crown Agents in the implementationof its whole reform process, including the assump-tion of executive functions. In Bolivia, where thedesign of the reforms benefited from IMF assis-tance, the World Bank financed the new humanresources administration. Bolivia also receivedInter-American Development Bank (IDB) financ-ing for a new technology system, while the NordicFund for Development and several European coun-tries provided grants. The reform in Peru was sup-ported by several IDB loans spread between 1991

and 1999 that financed nearly every step of the cus-toms reform program. Also, IDB experts assisted inthe design, implementation, and monitoring of theprogram. In Uganda, DFID supported setting upURA, including providing an external adviserwith line managerial responsibilities. AlthoughMorocco’s reform benefited from the outset fromtechnical assistance provided by the French govern-ment and the IMF, it financed the implementationof its reforms with domestic resources.

Components of Customs Reforms

The reform programs generally covered issuesrelated to all components of customs administra-tion, including the legal framework, management,human resources, IT, and customs procedures, par-ticularly those related to valuation and physicalinspection.

Customs Code

In all countries, except Ghana, Uganda, and thePhilippines, a new Customs Code covering proce-dures, customs services, and status of personnelwas adopted to provide a firm foundation to thereform process. In Morocco, the Customs Code wasrevised at the end of the 1990s and was made fullyconsistent with the Revised Kyoto Convention.6 Insome countries the reform program replaced an oldand obsolete code that had become an obstacle tothe introduction of new procedures more in tunewith changed business practices. Implementingregulations and other legislative changes, includingthose in the Penal Code, were introduced. In South-east Europe, new customs legislation was intro-duced to replace the overregulating socialist laws.7

Policy and Operational Lessons Learned from Eight Country Case Studies 111

6. The Morocco Code revisions include a clarification that per-mits risk-based verification instead of 100 percent physical veri-fication, and a provision for minor sanctions for inadvertenterrors in the customs declaration. Also, a variety of regulationsthat were issued over the years were consolidated in the newcode.

7. While at first the legislative changes consisted of copying theEU Customs Code, it rapidly became obvious that the code wasnot addressing matters pertaining to national sovereignty suchas enforcement, organization, and penal provisions and thus wasnot applicable on its own. In addition, there were serious dis-crepancies between the EU-inspired customs legislation and therest of the countries’ laws and regulatory frameworks, which ledto its inapplicability, especially in the enforcement area.

In the Philippines, a large number of laws and reg-ulations were issued, mainly in the areas of the auto-mated customs operating system, the control system,and the structure of the customs department. InTurkey, the EC Customs Code, which also coveredcustoms administrative procedures, became part ofthe domestic legislation. Following the adoption inPeru of a new general customs law, subsequent leg-islative changes were consolidated and the generalcustoms law was updated in 1996. In Uganda, theEast African Customs Act from the 1960s remainedin effect. The authorities have accepted the RevisedKyoto Convention, which implies that they have toadjust the existing legislation.

Customs Management

All reform plans provided for managementchanges, changes in the status of the customsadministration and its personnel, and changes inthe structure or organization of the services con-cerned. Staffing changes were the key elements insome programs.

In Morocco, management changes focused on afunctional and territorial reorganization, includ-ing the redistribution of tasks between centraland regional authorities, and a more pronounceddecentralization. This reorganization is beingassessed on an ongoing basis and adjusted in a flex-ible manner. With the shift away from physicalinspection to post-release control, staff have beenreassigned and trained for new assignments.

The reform in Mozambique reflected a boldapproach. Given that customs and most of the civiladministration were severely dysfunctional follow-ing years of civil strife, the government assignedmost of the key operational management functionsto external consultants (see box 6.1). The programcalled for significant staff renewal. In addition, a spe-cialist valuation team was set up, supported by a soft-ware valuation module and a visiting control team.

In Bolivia, Peru, and Uganda, managementreforms included granting administrative andmanagement autonomy to customs, and providinggreater autonomy on matters of personnel policy,recruitment, training, and, subject to approval,remuneration. In Uganda, the Uganda RevenueAuthority (URA) was created in 1991 as an inde-pendent authority with the responsibility of col-lecting and accounting for all domestic and foreign

trade taxes. Subsequently, further measures weretaken to strengthen management and its independ-ence in response to a perceived decline in perform-ance. These measures included the appointment ofa new board and senior managers, and a clarifica-tion of the relationship between the board, man-agement, and the Ministry of Finance. URA was nolonger responsible for advising the government ontax policy issues, but was charged with advising theMOF on the revenue implications and tax adminis-tration aspects of tax policy changes.

In Macedonia, the placement of customs underthe Ministry of Finance (customs previouslyreported to parliament and the government) wasinefficient at first as there was no integration withthe ministry, only the addition of an extra layer ofbureaucracy.

In Peru, full autonomy allowed customs toadopt a structure and develop its own proceduresto discharge its tasks with clearly established func-tions for each organizational subdivision and unit.8

The reforms in Bolivia, Peru, and Uganda includeda large-scale personnel changeover. In these threecountries the reforms provided for greater budget-ary autonomy, as they were given (or promised) ashare of customs revenue to cover operating andcapital outlays independent of the governmentbudget. While URA’s budget was to receive 2–4 per-cent of collected revenues, the actual budget alloca-tion was lower.

In Turkey, a number of inefficient offices wereclosed, customs and enforcement services were inte-grated under single regional directorates, and oper-ational responsibilities were delegated to regionaland local offices, while a number of regional direc-torates were eliminated. In the Philippines, a groupresponsible for the development of IT in customswas set up, and a valuation center and library werecreated charged with the development, mainte-nance, and dissemination of the department’s data-base on values. In Ghana, the customs managementsystem that had been designed for Mauritius andthat was smoothly interfacing with the initialTradeNet9 from Singapore was adopted. As part of

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8. Customs prepares proposals for customs legislation changes;it has no role in tax legislation and policy.

9. The Singapore TradeNet links multiple parties involved inexternal trade, including 34 government agencies, to a singlepoint of transaction for most trade-related transactions.

the arrangement, a company was created andcharged with the implementation of the TradeNetand the Ghana Customs Management System(GCMS) for the Customs Excise and PreventiveServices (CEPS). However, CEPS remains a ratheroutmoded and inefficient organization. Its organi-zational structure reflects serious shortcomings thatprevent it from fully internalizing the ongoingreforms and taking advantage of the possibilitiesoffered by the modern customs process in place.

In most transition countries (despite statisticaldata pointing to an overabundance of clearancestations) the tendency was to maintain as manyclearance offices as possible because of politicalpressures and vested interests.

Human Resources

The experiences recorded in all case study countrieshave shown that customs reform can only succeedwith competent staff who internalize the objectivesof the reform. It was also generally acknowledgedthat adequate compensation was necessary to moti-vate staff and tackle the thorny issue of integrity.The integrity issue has serious implications for staffrecruitment policies, training, and compensation.The scope of human resources reform in the coun-tries reviewed also depended on the degree ofautonomy granted to customs administrations inpersonnel policy matters. Human resources issuesare addressed in detail in chapter 2.

Salary increases have been a critical element ofmost reform initiatives. Better pay allowed therecruitment and retention of competent staff,enhanced operational efficiency, and countered theneed to supplement low official salaries throughcorrupt practices. Salaries were raised at the outsetof the reform in Bolivia, Mozambique, Peru, andUganda, with the largest increase made in Peru(600 percent), where salary levels of financial insti-tutions were matched and the salary scale wasshifted from the public to the private sector. Upongaining autonomy, Uganda’s URA raised salaries toa level compatible with that of the highest paid civilservants—those at the Central Bank—and a com-prehensive set of performance bonuses was intro-duced. However, real salaries slipped because ofinflation. By 2002, URA’s remuneration rankedonly 17th at the national level, some 40 percentlower than that at the Central Bank. The system of

salary bonuses, which was based on meeting rev-enue targets, did not achieve its objective, asbonuses were either not paid out despite meetingthe revenue target, or because the target was set atunrealistic levels. In Ghana, a similar situation pre-vailed. When the independent revenue authoritywas created, salaries were set at highly competitivelevels, but the premium over general civil servicesalaries eroded over time.

In Mozambique, new salary levels in customswere made comparable with those prevailing in theprivate sector. Part of the remuneration consistedof a variable customs allowance based on perform-ance and merit. Also, a pension plan was intro-duced and the health insurance system improved.In Bolivia, where salary increases ranged from22 percent to 73 percent, there were also monetaryincentives for group performance. In Peru, pro-ductivity bonuses were linked to expected resultsestablished in an operational plan, with individualshares based on performance. The strict applica-tion of civil service salaries to customs staffprevented any overall salary adjustment frombeing introduced in Morocco, the Philippines, orTurkey during the reform process. However, therewas greater flexibility in terms of providingovertime compensation, or year-end bonuses. InMorocco the prevailing, rather generous, bonussystem was made more egalitarian and wasextended to include staff involved in front-lineactivities.

Most reforms recognized that training must beprovided on a continuous basis to update staff onongoing developments in the customs administra-tion, including the elements of reform and modern-ization programs being implemented. In all coun-tries, except the Philippines, training was includedin the reform program, although with varyingdegrees of coverage. In Bolivia, Mozambique, andPeru, where preshipment inspection (PSI) compa-nies were hired, the PSI companies were required tooffer training in the area of valuation. In Bolivia,new staff regulations required a minimum ofannual training, which was taken into account forperformance evaluations. In Morocco, the trainingacademy was restructured. However, because of ageneral hiring freeze the academy is largely used forcontinuing education of customs staff and trainingof staff from French-speaking Sub-Saharan customsadministrations.

Policy and Operational Lessons Learned from Eight Country Case Studies 113

In Albania, the EU-supported Customs Assis-tance Mission (CAM-A) developed a comprehensivestaff management policy that included recruitment,career development, performance evaluation, andreward systems. Initially run by CAM-A, the systemwas subsequently handed over to customs manage-ment and proved to be sustainable.

Integrity and Corruption Issues

Integrity and corruption issues were central inBolivia, Mozambique, Peru, the Philippines, andUganda. Most reform initiatives recognized thatefforts to address corruption would benefit fromsimplified and streamlined procedures that wouldlead to increased transparency in customs opera-tions and fewer contacts between traders and staff.Reliance on IT to manage customs processesreduced the scope for discretion as it cut down onface-to-face relations between importers and cus-toms officials. In addition, several countries put inplace specific measures to enhance integrity.Integrity issues are discussed in more detail inchapter 4.

A Code of Conduct or Code of Ethics was intro-duced in Bolivia, Mozambique, Peru, and Turkey.In Bolivia and Mozambique, staff is required tosign an integrity commitment. The URA requiresmanagement staff to complete an assets declarationform and to notify URA of all substantial changesin asset ownership. Other initiatives undertaken byUganda are outlined in box 6.5 in the context ofresults of the reform. Similarly, the Peruviancustoms authorities can request presentation of asworn declaration of income and assets. In Turkey,a circular on ethical conduct was issued in 2001. Itclearly defines bribery and spells out how staffshould react when faced with corrupt practices.The World Customs Organization (WCO) ModelCode of Conduct largely inspired Turkey’s code.

In the Philippines, a series of legislative changeswere introduced to enhance detection capabilitiesand chances of successful prosecution in corrup-tion cases. Procedures to detect staff misconductwere improved in Mozambique as well. In Boliviaand Peru, the recruitment process includes back-ground checks of applicants with a view to ensur-ing honesty.

As members of the WCO, all case study coun-tries are signatories of the 1993 WCO Arusha

Declaration and signed on to the Maputo Declara-tion on customs integrity.10

Information Technology

In most of the case study countries, reliance oncomputerized processes was low. In some coun-tries, customs administrations lacked substantiveIT support (Bolivia and Mozambique) or operatedsystems that had nearly outlived their usefulness(Morocco) or were inadequate (Turkey andUganda), with the result that many operations werestill undertaken manually, with all the inefficienciesassociated with such work processes.

Upgrading IT and increasing its use significantlyhave been critical customs reform componentsbecause they make it possible to establish an auto-mated clearance process from submission of thecargo manifest and customs declaration to therelease of goods. IT also facilitates the implementa-tion of control systems based on risk-assessment,allowing selectivity in physical inspections, post-release controls and audits, and a tightening ofrevenue control. Upgraded IT also contributes toshortening the time of customs clearance andimproves the efficiency of operations. A detaileddiscussion of the basic characteristics required forgood customs IT is included in chapter 13.

Peru developed an integrated computerized sys-tem encompassing all customs operations andregimes, control functions, statistics, and manage-ment. The clearance process was fully automated,including selection of inspections and post-releasechecking. Significant progress was also achieved inMorocco, the Philippines, and Turkey. In 1996,Morocco restructured its information directorateas part of the reform program and gradually intro-duced the main customs functions and operationsinto its computer system. A major renewal of thecomputer system is scheduled during 2003–2004.The systems in place became outdated and thehardware became increasingly difficult to maintain;a totally upgraded system is now being rolled out.

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10. For details see chapter 4. To strengthen customs’ integrity,the Arusha Declaration calls for a simplified trade regime,streamlined and transparent procedures, automated processes,appropriate personnel policies, and effective audits. To assistmember countries, a work group developed an Integrity ActionPlan adopted in 1999.

In the Philippines, where the tax computerizationprogram provided strong impetus to the reform,many procedures were brought into the automatedcustoms operating system. By 1997 nearly all seg-ments of the clearance process had been auto-mated, assisted by a risk assessment and selectivityprogram made possible by using UNCTAD’s ASY-CUDA++ software. In Turkey, the automation ofcustoms operations was a key component of cus-toms modernization (see box 6.2).

Since the initiation of its reform program in1991, Uganda has gradually upgraded its customsIT through various stages. The installation ofASYCUDA version 2 software, begun in 1997,allowed randomly selected officials to execute thephysical cargo verification and helped in the com-pilation of statistics, but proved difficult for dataretrieval and did not provide risk management. Asis often the case in the process of implementingcomputerized customs management systems, stafftrained in the operation of these systems wereassigned to other tasks, preventing customs fromreaping the full benefits of automation. In light ofthese experiences, the URA recently installed the

ASYCUDA++, with UNCTAD providing im-proved training.

Beginning in 1998, the Mozambique customsadministration gradually introduced the TradeInformation Management System software (ownedby CA, which was managing customs at the time)to support its customs clearance processes. The rollout program of the various process functionsaccommodated the capabilities of staff to adopt theprocess. Since the end of 1999, clearance of goodshas been computerized throughout the country. InGhana, the Ghana Community Network (GCNet)was, from the outset, the cornerstone of a vision toconnect all members of the trading community inan electronic data exchange system. The software inplace had been grossly underutilized and poorlymaintained, adding little value to the current pro-cedures. The rollout of advanced EDI (ElectronicData Interchange) and a new computerized cus-toms management system was initially plaguedwith problems, but these were eventually addressedand legislation to permit automation of the cus-toms operation was enacted in July 2002. The sys-tem is now fully operational.

Policy and Operational Lessons Learned from Eight Country Case Studies 115

BOX 6.2 Information Technology in Turkey

The computerization of customs offices andautomation of customs procedures was a keycomponent of Turkey’s customs modernizationprogram. Automation activities were coordi-nated by an independent Modernization ProjectUnit set up in 1997, with a senior official respon-sible for technical aspects.

A software system named BILGE (Computer-ized Customs Activities) was developed on thebasis of SOFIX software purchased from France,which was adapted to the needs of Turkey’s cus-toms. The system consists of four modules: asummary declaration module, a detailed decla-ration module, an accounting module, and anintegrated tariff module. In a successful pilotoperation, BILGE was initially installed at theIstanbul Customs Directorate in July 1998. Sincethen, BILGE has been set up at 65 customsoffices, realizing some 99 percent of all transac-tions. Procedures carried out electronically usingBILGE include cargo, import, and export decla-rations; transit and warehousing procedures; taxcollections; and risk analysis and control meth-ods. Declarations can be registered with cus-toms through kiosks located at customs offices,

electronic data interchange (EDI), and the Inter-net. Started at the Istanbul Customs Directoratein August 1999, applications of EDI rose rapidly,representing some 50 percent of all electronicdeclarations in mid-2003. All automated cus-toms offices are connected with each other andcustoms headquarters via local area and widearea networks.

In addition to customs transactions, foreigntrade regulations and data related to customsperformance are entered into BILGE. Export andimport declaration details are provided electron-ically to the State Institute of Statistics, allowingfor timely compilation of trade statistics. Com-prehensive training on the computerized cus-toms procedures was offered to customs officialsand to some 15,000 traders free of charge.Other software systems used by customs inTurkey include Vehicle Tracking Program,TIR/Transit Control, and Customs Data Ware-house. Customs Data Warehouse stores all infor-mation from BILGE and other systems, and feedsinto a customs valuation database.

Source: Oktem 2004.

Valuation Issues

Proper valuation is essential for the predictabilityand transparency of customs transactions. All casestudy countries are members of the WTO and thushave committed themselves to implement the WTOvaluation principles under the WTO Agreement onCustoms Valuation (ACV). Most of the countriesreviewed officially adopted the ACV during theircustoms reform. The Philippines began imple-menting the ACV in 2000, following the conclusionof its reform program. The ACV requires customsofficers to change their valuation procedures andrenders challenging invoice prices more difficultthan under prior valuation practices. Reform pro-grams, therefore, call for a strengthening of cus-toms capabilities in valuation assessment. Becausethe ACV requires that priority be given to adoptingthe transaction value for customs valuation pur-poses, customs officers now have to gather moreevidence or justification if they are to challenge thedeclared or invoice value.11

Implementing the ACV has proven to be diffi-cult in a number of countries. Implementationproblems include the frequent use of false invoicesthat grossly undervalue the merchandise and insuf-ficient training of staff to challenge the invoices.12

Also, the growing trade in second-hand goods aswell as trade undertaken by the informal sector,where poor or no records are kept, renders post-clearance inspections impractical. In practice, sev-eral customs administrations continue to rely, tovarious degrees, on price lists that are rarely sharedwith the trading community and that, at times, areinadequately updated.

In all case study countries, the reform programpaid attention to the valuation function. To assist inthe valuation of imports, Bolivia, Mozambique,Peru, and the Philippines resorted to the servicesof PSI companies. Elements of Peru’s program ofPSI-assisted import verification are provided inbox 6.3. Uganda first adopted a PSI program butlater discontinued these services for a variety of rea-sons, including claims that the PSI company did notprovide the staff training agreed to in the contract,

particularly in developing a valuation database. Ingeneral, recourse to PSI companies was initiated tosafeguard revenue since revenue leakages were oftenrelated to undervaluation and fraud. This wasintended to be a temporary measure to allow cus-toms administrations to build up their capacity. Ser-vices of PSI companies typically include import ver-ification covering quantity, quality, value, andcustoms classification.

There are differences among countries in theevaluation of PSI services. While in several coun-tries the revenue generation and dissuasion of fraudexperiences appear to have been positive, the PSIcompanies’ performance in improving nationalcapacity in customs valuation has often been ques-tioned.13 Lack of cooperation between PSI compa-nies and customs departments was noted inUganda, where customs often relies on a parallelvalue database rather than on current PSI data.Insufficient use of the information generated by PSIproviders undermined the effectiveness of theirservices in the absence of a systematic reconcilia-tion between PSI data and that used to calculateimport duties. It was often not clear what usewas made of the PSI-provided information. Peruis an exception as PSI valuation information isfully used by customs. The PSI company operat-ing in Mozambique also assisted customs staffin training on transaction value and delivered asoftware module on valuation. A problem noted inthe Philippines was the circumvention of PSI-conducted inspections.14

The reform program strengthened the valuationfunction in customs departments, including by set-ting up value databanks. In Peru, a databank set upin 1992 was developed on the basis of inspectioncertificates and verification reports issued by thePSI provider. A valuation unit was also established

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11. For an in-depth discussion of valuation, as well as for moredetails on this issue, see chapter 8.

12. Invoices are the easiest documents to forge. Unlike bills,bonds, shares, or any other securities or lending instruments,invoices have no security measures.

13. There are both advantages and disadvantages of hiring PSIcompanies. It is the duty of the government authorities to clearlydefine their roles and responsibilities, as well as to closely moni-tor performance. A related issue is at which stage in the valua-tion process should PSI companies enter? In most countries theyenter at the first stage, that is, assisting in or undertaking valua-tion activities. In Mexico, however, they enter at the secondstage, after a customs officer has valued and classified the goods.Hence, they check the importer’s declaration and the customsofficer’s effectiveness and honesty.

14. Such actions may involve splitting up or undervaluing ship-ments to remain below the threshold set for inspections, andabusive recourse to suspense regimes such as transit and tempo-rary admission (Parayno 2004).

in Mozambique, while that in Morocco was rein-forced. In Uganda, the staff responsible for valua-tion has been given special training, and steps areunder way in Turkey to extend the electronic data-base to customs valuation information. In severalcountries, declared values are investigated underrisk-based post-release verification systems, mak-ing use of valuation databases, price reference dataincluding information from other declarations andsupplier catalogues, statistical analyses, surveys, andinternational market studies. However, in Ghana,given CEPS’ limited capacity in customs valuation,strengthening customs valuation has become a keyand immediate priority to support customs officersin charge of documenting compliance checks. Inthe meantime, the services of four destinationinspection companies are being relied upon.

Physical Inspections

Before the reforms, most countries performed 100percent physical inspection on all incoming

imports, resulting in major clearance delays. Allcustoms reform and modernization programs nowaim to reduce the frequency of physical inspectionsto streamline and shorten the clearance process. Insome countries, the new Customs Code sets amaximum share of shipments subject to physicalcontrol (20 percent in Bolivia and 15 percent inPeru). In Turkey, customs endeavors to reduce thephysical inspection rate to 15 percent for imports.In Southeast Europe, 100 percent inspection wasmandated by law. Even when the legislation wasamended, customs continued to carry out system-atic inspections, largely for fear that subsequentreexaminations by the police of the same consign-ments would lead to the detection of unspottedirregularities. This stalled the proper deployment ofservice examinations for many years.

A system of risk assessments provides the basisfor selectivity in physical inspections. Risk criteriatypically include the origin of goods, importertrack record, type of goods, trade patterns, misclas-sification incentives, and shipment value. The

Policy and Operational Lessons Learned from Eight Country Case Studies 117

BOX 6.3 Import Verification in Peru

At the outset of its customs reform in 1991, Peruintroduced the Import Verification Program(IVP). The government resorted to external assis-tance in view of customs’ failure to effectivelyconduct the verification of import shipments forpurposes of assessing duties to be collected. Thisaction was also seen as a way to outsource anadministrative function to the private sector, inline with the reform’s objectives. Under the IVP,importers are required to submit shipments forverification by an authorized PSI companybefore the goods are shipped from the countryof exportation. Between 1991 and 1999, whenthe Brussels Definition of Value was in effect, theverification resulted in a certificate of inspection-covering the nature, quantity, value, and tariffclassification of the goods. These data were tobe declared by the importer and formed thebasis for the payment of duties. Customs verifiedthe consistency of the import shipment with thedata on the certificate of inspection.

When implementation of the ACV under theWTO became effective in 2000, PSI serviceswere used to provide an indicator of risk ratherthan a dutiable value. Accordingly, under IVPprocedures, instead of certifying the usual com-petitive price, PSI companies issue verificationreports in which they state the observed value

based on inspection of the shipment and pricecomparisons. The importer can either declarethe transaction value or the observed value. Rea-sonable doubt can be generated when thedeclared value is lower than the observed valuein the report. While the verification reports con-tain the tariff code, the importer can declare adifferent code, with discrepancies resolved bycustoms. About 80–85 percent of import ship-ments are subject to PSI intervention; importsvalued below US$5,000 and some other cate-gories are exempt. The cost of the IVP amountsto some US$45 million per year.

The IVP has made valuable contributions toimproving customs in Peru. In addition to pro-viding duty assessments at the beginning of thereform when customs capacity was deficient, itprovided most of the price information thatallowed customs to create and build up its valua-tion data bank, had a dissuasive impact on fraud,and contributed to the training of valuation offi-cers. Between 1992 and 2002, some 1.3 millioninspection certificates and verification reportswere issued by the PSI companies; these reportswere the main source of the 40,000 entries con-tained in the data bank as of March 2002.

Source: Goorman 2004.

system chooses shipments for one of the threeestablished color-coded channels. Goods selectedfor the red channel undergo physical and docu-ments inspection, those designated to the yellow ororange channel are subject only to document con-trol, while goods assigned to the green channel ben-efit from immediate release.

A risk assessment module of the computer soft-ware system automated the selection process inPeru, the Philippines, and Turkey. In cooperationwith the PSI company, customs in Mozambiquemoved to a risk-based approach to select goods forinspection. A small percentage of goods were stillrandomly selected for inspection.15 When selectiv-ity was introduced in Turkey in 1998, goods directedto the yellow channel could still be made subject tophysical inspection depending on the judgment ofthe customs officer. Before the initiation of thereform program in the Philippines, it was decidedthat inspections abroad by the PSI company con-stituted sufficient compliance with inspectionrequirements. This was followed by the introduc-tion of selectivity in physical inspections, whichbecame effective early under the reform program.Selective controls were one of the first elements ofthe reform program introduced in Morocco andhave greatly contributed to the drastic reduction ofclearance time. In Bolivia, the selection of ship-ments for physical inspections is totally random.Customs management in Uganda is working on theintroduction of a risk-based inspection system.Ghana’s risk assessment system results in the greatmajority of goods being selected for physicalinspection. This is, to a large extent, due to the broadcategories of goods that are subjected to mandatoryinspection by the Ghana Standards Board.

Revenue and Trade Facilitation

The challenge faced by all case study countries hasbeen to achieve the trade facilitation objectivewithout undermining the revenue mobilizationfunction of customs services, which is the mostimportant motive for undertaking the customsreforms. As there were indications that trade liber-

alization measures would tend to reduce revenuesfrom international trade transactions, a specialeffort was made to enhance the revenue-generatingcapabilities of customs. Improvement of proce-dures and simplification of formalities havereduced the frequency of physical inspections,while automation of operations has streamlinedoverall customs procedures. These measures are inline with the overall Revised Kyoto Conventionobjectives of simplification and harmonization ofcustoms procedures. The continued implementa-tion of the convention’s objectives will reduce theincidence of smuggling, enhance overall integrity,lead to increased budget revenue, and reduce trans-action costs for traders.

Efforts to upgrade staff integrity and qualifica-tions brought about in part by more selectiverecruitment and improved training, and strength-ening and expanding of post-release controls andaudits to keep smuggling in check, would con-tribute to safeguarding revenue.

In several countries, customs clearance is nowconducted under automated uniform procedures,from manifest submission to the release of ship-ment. Peru has put in place an advance clearingsystem for importers in good standing. In Turkey,simplified procedures were introduced, includinga waiver of some document requirements (salesinvoice, certificate of origin, and movement certifi-cate) for companies satisfying certain conditions. InUganda, further streamlining took place inearly 2002, including processing of trucks, forward-ing of border documentation to the centralcustoms office, a single verification of shipments,inspection of second-hand cars, and the gradualintroduction of Direct Trader Input (DTI). InMorocco, procedures for the temporary admissionsregime were substantially improved. In Macedonia,the management of licenses and quotas is handledby customs through a totally transparent WorldWide Web application based on a first-come first-served principle that eliminates negotiationsbetween importers and government officials.

For most countries the development of a strongaudit system constitutes a major instrument insafeguarding revenue. This requires the enhance-ment of intelligence and information gathering andanalysis, which also helps to combat smuggling. InPeru, an intelligence unit was included in the struc-ture of the audit department, while in Uganda the

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15. Random selection of shipments for physical inspectionunder a system of general risk-based selection is used to test therobustness of the system, especially the effectiveness of selectedrisk factors.

program called for increased support for theinvestigation department. In Morocco, the reformprogram also recognized the need for a significantupgrading of intelligence activities. In Moroccoand Uganda, a territorial redeployment of man-power with more efficient control procedures andincreased checkpoints was part of the restructuringof customs services with a view to combating thecircumvention of customs border controls.

A new payment control system in Peru providestight control of payments made electronically orotherwise. In the Philippines, the establishment of adata security system ensures the protection of pay-ments of duties to banks and their transmission tocustoms. Also, the introduction of online releasesystems helps avoid the illegal release of shipmentsfrom customs custody by using spurious docu-ments. In Mozambique, measures to safeguard rev-enue include a tightening of duty exemptions con-trols, a closer monitoring of movements in and outof free zones supported by computerized records,and the enforcement of security arrangementsfor temporary admission regimes. In addition, newtransit procedures have been introduced and guar-antee centers established.

Outcomes of the Reform Programs

Under ideal circumstances, effectiveness and effi-ciency indicators should be used to measurewhether the reforms have achieved their objectives.Partial indicators were used and these measure theimpact of the modernization efforts on revenuegeneration and on customs clearance time forimports. Surveys of customer satisfaction couldalso be used as important gauges of success.

Fiscal Performance

The impact of customs reforms on tax revenue is anoutcome of two separate factors. First, streamlinedcustoms clearance procedures, together withstrengthened enforcement and higher compliance,can lead to higher collection rates for a given levelof imports by reducing revenue-reducing acts ofcorruption and smuggling opportunities. Second,good customs procedures, combined with tradeliberalization measures, reduce the cost of importsand will lead to higher imports for a given level ofGDP. The combined effect of these two factors will

affect the contribution of trade taxes to budget rev-enue. Anticipating that the share of trade taxes inthe overall revenue structure is likely to fall as aproportion of total revenue as a country’s taxableeconomic base expands, and certainly with tradeliberalization, most countries have also strength-ened their domestic tax systems mainly by intro-ducing a VAT.

Tariff reductions made in conjunction with cus-toms reform positively affected trade, but initiallyhad an adverse impact on customs duties in thecountries reviewed. The reform often replaced salestaxes by the VAT. Higher VAT rates accompaniedthe cuts in import tariffs, and raised import rev-enues other than customs duties for a given level ofimports.

The actual outcome of the reforms indicates thatthe import taxes-to-GDP ratio increased the mostin Ghana, Mozambique, Peru, and Uganda, whileregistering the largest decline in the Philippines(see table 6.3). In Mozambique and Peru, theimproved revenue performance resulted from theincrease in the ratio of import taxes other than cus-toms duties to imports, assisted in Peru by a higherimports-to-GDP ratio. In Turkey, the rise in theimport taxes-to-GDP ratio, which was more lim-ited, reflected a substantial increase in the importratio in the face of a limited reduction in importtariffs. In Uganda, all factors, including an increasein the ratio to imports of customs duties and otherimport taxes, and a higher imports-to-GDP ratio,made positive contributions. In Ghana, the increasein the import taxes-to-GDP ratio was fully due to arising import taxes-to-imports ratio while theimports-to-GDP ratio declined. Clearance timesand revenue performance exceeded expectationsfrom early 2001 to mid-2003. The Treasury hasbenefited from accelerating revenues and morerapid access to tax payments.

When measured in relation to GDP, the decline inreceipts from customs duties in Bolivia, Morocco,and Turkey, as well as the increases in Peru andUganda, amounted to less than 1 percentage point. Inthe Philippines, the drop was 2.5 percentage points ofGDP, largely due to a reduction in tariff rates.

Enforcement

There are indications that important progress hasbeen achieved in reducing smuggling in Peru and

Policy and Operational Lessons Learned from Eight Country Case Studies 119

Uganda. Such efforts have been less successful inBolivia and Mozambique. To enhance enforcementa number of initiatives have been pursued, includingpreventive inspections; expanded audit units; coop-eration with other authorities, including the policeand private entities; and improved intelligence andinformation. In some countries the lack of a centraldatabase for enforcement purposes and the difficul-ties in adapting inspections to automated clearanceprocedures have impaired enforcement efforts.

In Bolivia the reforms helped reduce smuggling,especially of commodities of mass consumption;however, problems remain in small-scale smuggling,which benefited from much softer enforcementrules. At the same time, under the new enforcementsystem in Mozambique, seizures of illegallyimported goods have increased substantially. Thereis a commonly shared perception that smugglinghas increased because of the growing importance ofthe informal sector in cross-border activities. InPeru, preventive inspections and other actions to

combat smuggling are taken by customs in coopera-tion with other public and private entities, includingthe national department for fraud prevention andborder control. Customs also more than doubledthe number of auditors in recent years. Althoughthere are signs in Uganda that fraud is declining, theincidence of fraud remains high. A detailed auditsuggests that up to 70 percent of the sampledinvoices are false or spurious, substantially compli-cating the assessment of correct customs duties.Also, the removal of PSI intervention in 2000 wasnot accompanied by a strengthening of valuationcapabilities.

In Turkey, control units are concerned thatreduced physical controls could weaken enforce-ment because of insufficient access by enforcementstaff to the central customs database and difficultiesin adapting inspection to automated clearance pro-cedures. Regional directorates also seem to lack theproper sources of data for customs valuation. InMorocco, efforts are continuing to centralize and

120 Customs Modernization Handbook

TABLE 6.3 Revenue and Import Performance Before and After Customs Reforms

Bolivia Ghanaa Morocco Mozambique Peru Philippines Turkey Uganda

(Percent of Imports)

Customs dutiesBefore reforms 5.4 4.6 13.5 8.0 12.3 13.9 3.2 3.4After reforms (2001) 5.1 6.2 9.5 7.5 10.6 3.4 0.8 5.4

Import TaxesBefore reforms 20.5 10.5 36.2 11.2 23.0 18.2 13.0 7.5After reforms (2001) 21.4 15.4 28.4 19.7 33.1 6.4 10.9 14.2

(Percent of GDP)

ImportsBefore reforms 22.4 59.6 27.0 27.6 11.1 28.6 17.8 23.4After reforms (2001) 21.2 46.2 33.7 26.6 13.3 45.3 28.4 29.1

Customs dutiesBefore reforms 1.2 2.8 3.7 2.2 1.2 4.0 0.6 0.8After reforms (2001) 1.1 2.9 3.2 2.0 1.4 1.5 0.2 1.6

Import taxesBefore reforms 4.6 6.2 9.8 3.1 2.6 5.2 2.3 1.7After reforms (2001) 4.5 7.1 9.6 5.3 4.4 2.9 3.1 4.1

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

streamline intelligence gathering and processing. InSoutheast Europe, where customs had traditionallyno other responsibility than manning approvedborder crossings, enforcement was considered for along time to be the exclusive prerogative of the bor-der police. This resulted in the misconception thatthe border police were in fact in charge of monitor-ing customs activities to detect corrupt practices. Itdestroyed cooperation between the two agencies,and created an unhealthy climate of suspicion thatfurther encouraged customs to compensate forfrustration through increased corruption. The situ-ation gradually changed when legislation wasamended and when political decisionmakersbecame more aware of the new role of customs in amarket economy environment.

Clearance Time and the View of Traders

Customs clearance time has been reduced in all casestudy countries (table 6.4). Selectivity in physical

inspection is a major factor explaining the shorten-ing of customs clearance time. Obviously, cargothat is channeled through the green line will clearfaster than other cargo. Note, however, that the datareviewed are not fully comparable among countriesdue to differences in recording methodologies andthe precise sequence of transactions requiredbefore cargo clearance. Although customs clearancehas become faster, the period between the arrival ofgoods in port and their exit is often still excessivelylong because of the time needed for other proce-dures, including health, safety, and quality controls,and because of slow port operations.

During the first half of 2003, customs clearance inBolivia required 53 hours on average from the timeof registration of the import declaration to the exitof the goods from the customs warehouse. Excludingthe time elapsed between the inspection and controland the exit of the shipment, the average timeamounted to 37 hours. Although data on releasetimes are not published, they are readily available to

Policy and Operational Lessons Learned from Eight Country Case Studies 121

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

Green Yellow RedGeneral Channela Channel Channel Period

Bolivia 53:06 39:25 49:05 70:48 Jan.–June 2003Ghana KIA Airport 75 percent clearance the same dayGhana Tema Port 44 percent clearance in two daysMorocco 0:37 March 2003Mozambique 8 days mid-2002Peru 1:00–2:00 12:00 24:00 2002The Philippines 18:20 22:50 19:29 Dec. 1997Turkey In 24 hours: 71.5 percent of imports 2002

In 48 hours: 82.5 percent of importsUganda Up to one week

Under simplified procedures: Single item cargo: one day 2002Mixed cargo: three days

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

the authorities, underlining the effectiveness of theASYCUDA++ program in compiling the data, whichinclude a detailed breakdown of the time requiredfor the various steps of the clearance process and foreach of the color channels.

Morocco’s customs reduced clearance timeon average from one hour and 45 minutes inDecember 2001 to 37 minutes in March 2003.However, because of controls and procedures insti-tuted by other agencies, a container requires onaverage more than 10 days before it can leave theport area. Morocco is the only one of the case studycountries reviewed that systematically publishessuch data on its own. By introducing transparencyin the availability of customs data it not only putspressure on its own operations to further improveefficiency, but also clarifies the role of the otheragencies in overall clearance delays. This may leadthem to introduce speedier work procedures.

Substantial progress has also been reported inMozambique. By mid-2002, the time between filinga declaration and the posting of the release permithad been brought down to 8 days from 18 days asrecently as 2000, and 20 days before the reform.Customs clearance in Peru now averages between24 hours for the red channel to 12 hours for theorange channel, and one to two hours for greenchannel passage. In the Philippines, the averageclearance time ranges from 18 hours to 23 hours forimports with DTI, depending on the channel. InTurkey, 72 percent of imports are cleared within 24hours, and 83 percent within 48 hours. With theintroduction of simplified procedures in Uganda,customs clearance for single item cargo takes oneday and for mixed cargo three days.

In Southeast Europe, clearance times werehalved on average following two years of projectimplementation. From a high of up to five hoursof average waiting time for trucks at the bordersnext to the Balkans, implementation of the TTFSEprogram allowed for a significantly reduced wait-ing time compared to—a still high—two hourscrossing.

In Ghana, average clearance times at the KIAairport have dropped from three days to four hoursand customs document reviews, which used to take24 hours, now take minutes on average. At theTema port, clearance times have been reduced froma week on average to days. Currently 14 percent ofgoods are cleared on the same day, 30 percent take

between one and two days, 45 percent take betweentwo and five days, and 11 percent of clearances takemore than five days (often problematic cargo). Cus-toms documents review takes on average 15 min-utes instead of 24 hours while bank payments onlytake 10 minutes compared to a few hours beforeGCNet was fully operational.

Reactions to customs reforms from the users ofcustoms services have generally been favorable.There has been widespread agreement that overallcustoms performance has improved, and that theincidence of corruption has declined. In somecountries the initial opposition of traders to reformdisappeared and gave way to approval when gainsfrom the reform became noticeable. In countrieswhere customs sought closer cooperation with theprivate sector, the new openness was widely appre-ciated. However, users emphasize that customsmodernization is an ongoing process that needs tocontinue and keep up with modern trade practices.In Southeast Europe, a new partnership betweencustoms and the private sector materializedthrough the creation of “Pro-Committees,” whichwere supported through SECI and the StabilityPact.

In Bolivia, users feel that in some sectors theincidence of physical inspections is still high andsmall-scale smuggling remains widespread. Theywould like to see improved coordination betweencustoms and warehouse operators, and extendedhours for customs operations. In Morocco, thewillingness to listen and the new openness of theCustoms Directorate in reporting on customsreforms has been greatly appreciated by the tradecommunity, and is reflected in periodic customersurveys, the results of which are published. (Moredetail on the cooperation between customs and theprivate sector in Morocco is in box 6.4.) Traders inMozambique agree that the reforms have madesubstantial progress, but are looking forward tothe promised introduction of electronic customsdeclarations and duty payments. The practiceof customs to consult with them is very muchappreciated.

Following initial opposition by vested public andprivate sector interests in Peru, both have come toview the reform as highly successful in the areasof trade facilitation and revenue generation. Withrespect to the reforms undertaken in the Philippines,press reports were generally favorable and trade

122 Customs Modernization Handbook

representatives registered their satisfaction with theimprovement in customs operations. However, bythe late 1990s the much-hailed results of the reformshad not been sustained and customs services wereagain criticized as inefficient and corrupt. One rea-son for this backtracking was the erosion of politicalsupport for the reforms. At present, efforts are underway to restore the previous degree of satisfactionwith the reform outcomes. In Turkey, in a small sur-vey of traders, 70 percent recorded that they weresatisfied with the progress made in modernizingcustoms clearance processes. In Uganda, relationsbetween customs and the private sector are seen assatisfactory and cooperation has improved as aresult of the reforms. Private sector operators wouldwelcome further progress, particularly in the areas oftransparent use of price lists for valuation, the intro-duction of customs clearance at the border or inports in Kenya and Tanzania rather than in Kam-pala, and greater emphasis on risk-based controlprocedures.

In Ghana, the reforms showed that private–public sector partnerships work. GCNet anchoredthe reforms and ensured continuity and focus onthe reform objectives during a period of politicaltransition, and at a time when no other local organ-

ization had the wherewithal to effect such a drastictransformation of trade and customs procedures.

Anticorruption Measures

In several countries where the incidence of corrup-tion was high, targeted measures under the reformprograms have resulted in reduced corruption andenhanced staff integrity. Greater reliance on com-puter support in customs operations has resulted ingreater transparency in those operations. In Peru,Mozambique, and especially Bolivia, staff renewalat the outset of the program enabled customs toremove corrupt personnel. The more limited staf-fing changes in Uganda, together with the rathertimid use of other instruments to fight corruption,may have contributed to more modest progressin improving integrity than in other countries(box 6.5).

In Bolivia, where the eradication of corruptionwas central to government reform, the nearly com-plete changeover of staff resulting from subjectingall staff to new competitive recruitment was thefirst step in the reform process. At the time of thereview it was estimated that 90 percent of the staffwas new. There is a widespread view that this has

Policy and Operational Lessons Learned from Eight Country Case Studies 123

BOX 6.4 Customs Cooperation with the Private Sector in Moroccoand the Philippines

A significant factor in the successful implementa-tion of customs reform in Morocco was theactive participation of private sector partners inthe preparation of the reforms, and the open-ness of customs to private sector concerns,reflecting a dedication to transparency, effi-ciency, and partnership. This openness, focusingon quality service delivery and willingness to lis-ten to the concerns of traders, has been widelyappreciated by economic agents.

During the preparations for the implementa-tion of the ACV in 1998, customs was particu-larly concerned that traders were fully informedof the new approach to customs valuation. Cus-toms provided full information on the new prin-ciples and the risk assessment–based verificationprocess that it would adopt, thereby facilitatingthe transition to the ACV. In general, customsplaced great emphasis on trade facilitationmeasures in line with the Revised Kyoto Conven-tion. Changes in procedures were introducedfollowing consultations with private sector rep-

resentatives. The management of the temporaryadmission system and drawback systems areonly two examples of this fruitful dialogue. Inthe same spirit, customs has established a spe-cialized service of business advice to enterprises,and provides direct assistance by telephone andelectronically.

Even though there was no consultation onreform measures in the Philippines, the businesssector provided substantial material and finan-cial assistance to customs in the reform process,including setting up an online system for secur-ing final release of shipments from ports andwarehouses, and introducing encryption tech-nology for the electronic transmission of pay-ments data and the advance submission ofmanifest information. It also participated inmanaging a number of steps in customs clear-ance operations.

Source: Steenlandt and De Wulf 2004;Parayno 2004.

substantially contributed to lowering corruption.With improved procedures to detect staff miscon-duct, Mozambique has stepped up the number ofcases investigated and resulting staff dismissals. Inthe recruitment of senior managers and of thoseappointed to sensitive positions, background andintegrity checks are undertaken. With the targetedupgrading in quality of staff under the reform,60 percent of the initial staff has been removed,thus providing the opportunity to strengthenintegrity. However, the incidence of staff miscon-duct remains high and the process of disciplinaryaction lengthy.

At the outset of the reform program in Peru,about 60 percent of the staff was removed through“voluntary departure,” while those not leaving weresubjected to external tests, and corrupt personnelwere dismissed. The modernization of customs inthe Philippines initially was successful in stemmingcorruption, but since the late 1990s the situationreversed itself and traders again came to view cus-toms as one of the most corrupt public services inthe country.

Lessons Learned

Several factors played a key role in ensuring thesuccess of the reforms in the case countries studied.These are summarized in chapter 1 and discussedhere.

Good customs operations consist of coherentand interlocking sets of processes. An overall cus-toms reform program has a greater chance of yield-ing effective and sustainable results than partialreforms. In countries with successful reforms, feasi-ble measures were successively and progressivelyintroduced within an overall vision to establish amodern customs organization.

Political support was essential for the success ofthe reforms. Continuity in leadership is importantin carrying out reforms; continuity in managementis important in sustaining them. Strong and stableleadership with an opportunity to see the imple-mentation through to completion proved to beessential for success.

Sustainability requires continued political com-mitment. Even when successful reforms become

124 Customs Modernization Handbook

BOX 6.5 Addressing Corruption in Uganda’s Independent RevenueAuthority

Efforts to fight corruption were high on thereform agenda at the creation of the URA. Therewas a general perception, shared by its manage-ment and by private sector operators, that theincidence of corruption in customs staff was high.The anticorruption campaign in customs was inline with efforts to stem corruption in the publicsector, efforts that led to the creation of a Min-istry of Integrity headed by a forceful minister.

The anticorruption campaign in URA had sev-eral aspects. At the outset, URA provided salariesthat competed with the best of the public sectoror even those of the private sector. Alone amonggovernment units and autonomous agencies,URA requires all staff members to fill out an“Asset Declaration Form,” to be updated for sig-nificant changes in family status or in asset own-ership. Automation of customs processes wasstrengthened and recently ASYCUDA++ wasintroduced. An anticorruption campaign is pub-licized in customs offices with “in your face”messages (for example, “Corruption StopsHere” signs posted at the doors of managers).

More recently URA launched other initiativesin the anticorruption campaign and created anEthics and Integrity Committee, elected ethicscounselors who would be responsible for a seriesof anticorruption initiatives, and started workingon a code of ethics (which is still in the draftstage and could benefit from application of theWCO Model Integrity Code). The URA Commis-sioner made a well-publicized initiative to rein-vigorate the anticorruption campaign. (Hepromised strong measures, including firing com-bined with the possibility to submit voluntaryresignations with impunity, and a confidentiale-mail address and telephone number to reportcorruption.) Responses to these initiatives wouldbenefit from greater follow up. Yet, some earlysuccess was achieved when several URA man-agers were arrested for fraudulently benefitingfrom a drawback scheme.

Source: De Wulf 2004.

firmly embedded in a country’s administrative andinstitutional framework, their endurance is subjectto risks. These include changes in policy direction,weakening of political support, and changes in thereform leadership or management of customs, allof which can stall the reform or reverse its course.Other risks include lack of political commitment,inadequate funding for staff compensation andthe maintenance of IT infrastructure, changingcustoms-funding rules, and political interference inpersonnel management. When reforms clearly ben-efit both private traders and the Treasury, they cre-ate their own advocates, thus reducing the chancesof backsliding.

The reform must be realistic and consist ofreform measures that can be implemented. Theearly strengthening and stepped up application ofIT-based customs processing is essential for a suc-cessful reform. Full automation of clearance proce-dures and the establishment of risk-based controland audit systems critically depend on the properuse of IT. These actions set the stage for streamlin-ing and simplifying customs procedures to speedup the clearance process and reduce physicalinspections. They also help reduce contactsbetween customs staff and traders, thus reducingthe possibility of discretionary and accommodat-ing decisions that engender corruption.

A good funding strategy is needed to ensure thesuccess of a reform. Donor support and coordina-tion was critical for launching and implementingthe reforms in all of the eight case study countries.Domestic funding, complementing foreign financ-ing, was also important in ensuring the success ofthe reforms. This was even more acute in countrieswhere a culture of management by objective had tobe substituted for that of management by institu-tion. Donor coordination at the diagnostic level isalso important.

Coordination with other agencies is essential toreap the full benefits of the reforms. In no case wasit possible to document that trade facilitation wasable to extend effectively beyond customs, butsome reform initiatives explicitly include suchobjectives in medium- to long-term work pro-grams. Such coordination with other agencies isessential so that inefficiencies in obtaining importauthorizations related to health, safety, and otherpurposes—which can significantly delay the pro-cessing of trade operations—can be rooted out.

Customs reforms need the support of customsstaff and other stakeholders. Just as the autonomyof customs administrations can facilitate the imple-mentation of reforms, it can also strengthen thededication of staff to high performance standards.The administrative autonomy of customs also con-tributes to the achievement of reform objectives.Ideally, customs administrations should receive asmuch autonomy as possible in their administrationand operations, and should be provided with anadequate budget to effectively and efficientlyundertake their functions. They should also be pro-vided with clear evaluation criteria.

The personnel policies of customs were amajor factor in enhancing quality and integrity ofstaff. Personnel reform contributed to successfulcustoms modernization programs, particularlyin countries that proceeded with a large-scalechangeover of personnel and where existing staffhad to go through the same recruitment process asnew applicants and were also offered incentivesto leave. Salary upgrades were designed to attractand maintain qualified personnel, as well as tostrengthen integrity and financial autonomy. Amajor element of these new policies was also theintroduction of WTO-compatible declaration pro-cessing fees, which enabled customs to earmark suf-ficient resources to maintain their new, modernizedsystems.

Cooperation between customs and private sec-tor operators was a significant factor in the successof the reform programs. The change in the orienta-tion of customs from a nearly exclusive emphasison its role as enforcer and collector to one ofprovider of services, incorporating effective servicedelivery with its revenue mobilization responsibili-ties, requires strong support from the tradecommunity. Such support can be sustained by adeliberate outreach program to the private sector,including periodic high-level consultative meet-ings. However, the full transparency of regulations,performance indicators, and statistics, will be mostimportant in convincing the trade community.

Using clear performance indicators to monitorthe progress of reform is essential not only to eval-uate progress, but also to adjust the reform meas-ures to changing circumstances without losingsight of the big picture. Customs clearance time wasreduced in all the case study countries reviewed.Green channel designations as well as the incidence

Policy and Operational Lessons Learned from Eight Country Case Studies 125

of physical inspections are good indicators formonitoring clearance time and must be evaluatedwithin the context of the application of risk man-agement principles.

Further Reading

The various case studies referred to in this chapter are pub-lished in Luc De Wulf and José B. Sokol, eds. 2004. CustomsModernization Initiatives: Case Studies. Washington, D.C.:The World Bank, which is issued as a companion volume tothis publication.

Molnar, Eva. and Lauri Ojala. 2003. “Transport and Trade Facili-tation Issues in the CIS-7, Kazakhstan and Turkmenistan.”Washington, D.C.: The World Bank.

World Bank. 2002. “Trade and Transport Facilitation in South-east Europe Program.” Washington, D.C. www.seerecon.org/ttfse.

References

De Wulf, Luc. 2004. “Uganda.” In Luc De Wulf and José B. Sokol,eds. Customs Modernization Initiatives: Case Studies. Wash-ington, D.C.: The World Bank.

Goorman, Adrien. 2004. “Peru.” In Luc De Wulf and JoséB. Sokol, eds. Customs Modernization Initiatives: Case Studies.Washington, D.C.: The World Bank.

Mwangi, Anthony. 2004. “Mozambique.” In Luc De Wulf andJosé B. Sokol, eds. Customs Modernization Initiatives: CaseStudies. Washington, D.C.: The World Bank.

Oktem, M. Bahri. 2004. “Turkey.” In Luc De Wulf and José B.Sokol, eds. Customs Modernization Initiatives: Case Studies.Washington, D.C.: The World Bank.

Parayno, Guillermo L. Jr. 2004. “The Philippines.” In LucDe Wulf and José B. Sokol, eds. Customs ModernizationInitiatives: Case Studies. Washington, D.C.: The World Bank.

Steenlandt, Marcel, and Luc De Wulf. 2004. “Morocco.” In LucDe Wulf and José B. Sokol, eds. Custom Modernization Ini-tiatives: Case Studies. Washington, D.C.: The World Bank.

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127

7TWO DECADES OF WORLD

BANK LENDING FOR CUSTOMSREFORM: TRENDS IN PROJECT

DESIGN, PROJECTIMPLEMENTATION, and

lessons learned

Michael Engelschalk and Tuan Minh Le

TABLE OF CONTENTS

Bank Assistance in Customs-RelatedProjects 128

Pre-Project Diagnostic Work and Project Design 129

Project Implementation and Outcomes 142

Main Conclusions and Lessons for FutureBank Operations to Support CustomsModernization 145

Annex 7.A. Distribution of Projects withCustoms Components by Region,1982–2002 149

Annex 7.B. Selected Criteria for OED ProjectEvaluations 150

Annex 7.C. Correlation Estimation 150

Annex 7.D. Reforming Tax Systems: The WorldBank Record in the 1990s 151

Further Reading 152

References 152

LIST OF TABLES

7.1 Approved Amounts for Customs Componentsof Technical Assistance Projects,1982–2002 130

7.2 Distribution of Approved Operations withCustoms Component by Project Category,1982–2002 131

7.3 Pre-Project Diagnostic Analyses inTechnical Assistance Projects,1982–2002 132

7.4 Summary of Objectives 135

7.5 Performance Indicators 136

7.6 Comprehensiveness of ProjectDesign 139

7.7 Summary of Suggested Rating of Outcomesof Customs Activities 143

7.8 Correlation Estimation:A Summary 144

7.A.1 Distribution of Projects withCustoms Components by Region,1982–2002 149

LIST OF FIGURES

7.1 Institutional Environment AssessmentFramework 138

The authors gratefully acknowledge the research assistance pro-vided by Patricia Laverley (OED PK) and Gonzalo Salinas(OEDCR). They wish to thank Yvonne M. Tsikata (OEDCR),Gianni Zanini (WBIPR), and Michel Zarnowiecki (ECSIE) fortheir valuable comments and suggestions received over thecourse of the development of this chapter.

LIST OF BOXES

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 ofPerformance Indicators: The Case of Tradeand Transport Facilitation Projects inSoutheast Europe 137

7.4 Integrated Approach in Process Management:The Case of the Tunisia Export DevelopmentProject 141

7.5 Increased Bank Emphasis on Coordinationwith Other Donors 142

7.6 Quality of Pre-Project Preparation and DesignMatter: Two Project-SpecificCases 146

7.7 What Triggered the Modification of ProjectObjectives or Components 147

7.8 Implementation Management Issues: The Caseof the Senegal Development ManagementProject 148

128 Customs Modernization Handbook

Over the past 20 years the World Bank has providedsubstantial support for reforming customs admin-istrations in developing countries. While this sup-port was seldom provided in the form of customs-specific technical assistance operations, manyprojects in trade facilitation, infrastructure, andpublic sector included customs reform compo-nents. In addressing customs reforms, the Bank hasaccumulated a significant amount of knowledgeand experience, which should be used in designingnew projects as well as in improving existing ones.

The chapter is structured as follows: The firstsection, Bank Assistance in Customs-RelatedProjects, summarizes the level, format, and regionaldistribution of World Bank lending for customsreform. The analysis is based on the projectdatabase (Trade Assistance Evaluation ProjectDatabase—TAEPD) compiled by the World Bank’sOperations Evaluation Department (OED) andproject-specific documentation including staffappraisal reports (SARs), project appraisal docu-ments (PADs), implementation completion reports(ICRs), and OED evaluation summaries.1 The sec-ond section, Pre-Project Diagnostic Work andProject Design, provides a detailed discussion ofissues, trends, and patterns in setting objectives,selecting performance indicators, and definingproject activities. The third section, Project Imple-mentation and Outcomes, identifies key problemsin diagnostic work, project design, implementationmanagement, and supervision that affect final proj-ect outcomes and sustainability. The concluding

section discusses the design and process issues ofprojects with customs reform activities and drawskey lessons for future Bank operations to supportcustoms modernization.

Bank Assistance in Customs-Related Projects

The World Bank has been active in providing sup-port for customs reforms in all geographicalregions. A variety of lending instruments was usedfor these assistance projects, and the distribution ofprojects differed across region.

Rationale and Lending Instruments

World Bank customs modernization activities havegenerally been part of broader reform programs tofacilitate trade, support general revenue mobiliza-tion, enhance public finance management,strengthen public sector human resources manage-ment, support infrastructure development, orenhance competitiveness. In many cases, customs isjust a small component in a complex reform pro-gram.2 At the other extreme, in very few cases, suchas the Russian Customs Development Project(RCDP), customs reform has been the sole focus ofan operation.

1. See also, Operations Policy and Country Services 2003, andOED 2004.

2. A typical example is the Economic Recovery Credit Project(Chad), which lists among its various objectives “reinforcementof the Customs Office through training programs and the provi-sion of equipment and materials.” The project document, how-ever, does not offer any specific plan for implementation nordoes it offer a detailed cost allocation among different compo-nents of the project.

Customs reform components are embeddedin investment and technical assistance loans (TALs)as well as in structural adjustment loans and credits(SALs). In the case of a technical assistance (TA)operation, the project document specifies theallocation of funds to each particular project com-ponent. Structural adjustment operations aregenerally designed to provide financial support fora policy program such as in fiscal reform or publicresource management. The operations do notrequire an in-depth specification of project compo-nents nor do they specify the allocation of thefunds to different components. Given the differentnature of SALs, the following analysis focuses solelyon the Bank’s TA components to distill lessons forfuture customs modernization activities.

Scope and Distribution of Bank Assistance

During 1982–2002, the Bank engaged in 117 proj-ects with a customs reform component; 38 of thesewere TA projects and 29 were SALs. Annex 7.Asummarizes the distribution of these projectsacross regions and periods.

In the SALs with customs components, two-thirds of the policy reforms retained were traderelated, while one-third were public finance related.With respect to the customs-related components,75 percent aimed at process simplification, 16 per-cent at improvements in legislation, and 9 percentat human resources development.

The customs-related conditionalities and scopeof activities included in the SALs vary widely fromthe very specific to the most ambitious. Some SALsdeveloped specific conditionalities related to spe-cific customs procedures and operations (GeorgiaThird Structural Adjustment Credit Project, JordanThird Economic Reform and Development LoanProject, and Morocco Policy Reform Support LoanProject), specific aspects of human resources man-agement and training (Haiti Second TechnicalAssistance Project, Tunisia Development of theCapacity to Administer Foreign Trade), revision ofthe Customs Code (Nigeria Trade and InvestmentPolicy Loan Project), and targets for simplificationof procedures to facilitate trade (Morocco SecondIndustrial and Trade Policy Adjustment LoanProject). Some SALs imposed broad and ambitiousconditions for customs modernization, such asstrengthening customs administration (Sao Tomeand Principe Strengthening Planning Budgeting

Implementation and Control Project, CambodiaEconomic Rehabilitation Credit Project) orstrengthening the role of government in qualitycontrol of imports (Senegal Agricultural SectorAdjustment Credit Project). For the purpose of thischapter, we do not particularly analyze the 79 SALsin the database because SAL conditionalities aredifficult to monitor in their linkage with TA pro-vided, and the Bank’s expertise is in general notexplicitly tested in SALs.

Table 7.1 shows the allocation of approved TAoperations (approximately US$309 million in total)toward customs-specific components by periodand by region. The RCDP by itself attractedUS$140 million—more than 45 percent of the totalof financing for Bank customs-related projects.With or without the RCDP, Europe and CentralAsia (ECA) countries far outweighed any otherregion in attracting Bank funds. The ECA regionattracted about US$213 million with the RCDPincluded (approximately 69 percent of the totalcustoms-related TA lending of US$309 million),and US$73 million without the RCDP (or 43 per-cent of total lending).

Table 7.2 depicts the distribution of the 38 TAoperations with customs components by five proj-ect categories: customs-specific, trade-related, infra-structure, public finance, and others. The single cus-toms-specific project, the RCDP, drew the highestshare of the total approved loans for customs com-ponents (45 percent), whereas the customs activitiesembedded in infrastructure projects obtained thelowest share (3 percent of the total amount of cus-toms loans with the RCDP, and 5 percent of the totalwithout it). Public finance reform projects attractedthe second highest share (32 and 59 percent of thetotal approved loans for customs, with and withoutthe RCDP, respectively), followed by trade-relatedprojects (16 percent and 30 percent with and with-out the RCDP). Except for the RCDP, public financeand trade-related projects are ranked second andthird, respectively, in terms of average customs proj-ect amounts (column 4) and the share of customsoperations in the total Bank-approved operationsby project category (column 5).

Pre-Project Diagnostic Workand Project Design

Bank project documents provide detailed informa-tion on the pre-project diagnostics and project

Two Decades of World Bank Lending for Customs Reform 129

130 Customs Modernization Handbook

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

Fiscal Year 1982–86 1987–91 1992–96 1997–2002 1982–2002

Amount Amount Amount Amount AmountRegion Approved Share Approved Share Approved Share Approved Share Approved Share

Sub-SaharanAfrica 0.24 8 8.63 86 5.29 7 11.67 5 25.8 8

East AsiaandPacific 20.3 26 1.1 1 21.4 7

EuropeandCentralAsiaa 0.3 3 48.2 62 164.5 75 213.0 69

LatinAmericaandCaribbean 2.6 92 1.15 11 22.0 10 25.7 8

MiddleEast andNorthAfrica 3.82 5 9.0 4 12.8 4

South Asia 10.45 5 10.5 3

Total 2.8 100 10.1 100 77.6 100 218.7 100 309.2 100

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

design. To track the evolution in pre-project diag-nostics, the 1982–2002 review period is dividedinto two subperiods, 1982–93 and 1994–2002. Therationale for the time breaking point is two-fold:Because the OED database does not have anyinvestment or TA projects with customs compo-nents during 1982–84, the natural break point thatevenly divides the 1985–2002 period is 1993–94.Also, a number of projects with substantial customscomponents, such as Turkey Public Financial Man-agement, RCDP, and Trade and Transport Facilita-tion in Southeast Europe (TTFSE), were approvedafter 1993, and this offers an opportunity to analyzeany shift in the Bank’s approach to assistance ofcustoms reforms.

Pre-Project Diagnostic Framework

Proper pre-project preparation and diagnostic workare critical for devising reform options, anddetermining project priorities and appropriatesequencing of activities. Several tools are available tosupport pre-project diagnostic work (see chapter 1).

Basically, a comprehensive diagnosis should useboth quantitative and qualitative indicators andlook at the effectiveness and efficiency of the institu-tion, institutional design and management, and theinstitutional and economic environment of the cus-toms administration.

The review of Bank operations reveals, however,that a significant number of TA operations lacksubstantive diagnostic analysis. While the leveland comprehensiveness of pre-project diagnosisdepend on the scope of the project envisaged, aninstitutional analysis is essential even for small proj-ects that address only specific elements of customsmanagement and operations. However, out of atotal of 38 TA projects with a customs reform com-ponent in the OED database, only 20 projects (orless than 53 percent) were designed on the basis ofan institutional diagnosis. Across the projects thatwere designed following a pre-project diagnosis, theapproach to identifying institutional weaknesses, aswell as reform needs and priorities, differed widely.This indicates that project preparation and design

were largely ad hoc and lacked a common method-ological framework. Table 7.3 summarizes thescope of the diagnostic analysis of the 20 projectswith a pre-project diagnosis.3 Box 7.1 offers threeproject-specific cases.

While all 20 projects provided some kind ofqualitative diagnostics, in very few cases was aquantitative analysis carried out to probe thestrengths and weaknesses of customs administra-tions, especially regarding effectiveness, efficiency,and integrity. However, pre-project diagnosticsimproved over time, especially in the case of themost recent projects (those projects approved inthe late 1990s and early 2000s).

Customs reform covers much more than justcustoms administration. More than half the proj-ects in the sample evaluated the legislative frame-work for customs operations, ongoing or planned

customs reform strategy, organizational structureand functions, implementation of the harmonizedsystem, customs rules and procedures, the status ofautomation, and office facilities. The depth of theanalysis was, however, not uniform across projectsand assessment areas. For example, almost all proj-ects with diagnostics examined the existing cus-toms laws and regulations (95 percent), while a sig-nificantly lower share analyzed more specific issuessuch as the implementation of the harmonized sys-tem (60 percent) or the complexity of rules or pro-cedures (70 percent). The fact that a substantialshare of project preparation activities (65 percent)included a diagnosis of the existing IT infrastruc-ture and automation plans reflects the generallyhigh share of IT-related costs in the customs com-ponents of the TA projects.4 Interestingly, there wasfar less analysis of the system of inspection of goods

Two Decades of World Bank Lending for Customs Reform 131

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

Share ofTotal Customs

Amount OperationsApproved Approved in Total Share in Total(Customs Amount Average Approved Amount Allocatedand Non- Number Allocated Customs Operations for CustomsCustoms of for Amount by Project With Without

Project Activities) Projects Customs per Project Category RCDPa RCDPb

Category [1] [2] [3] [4]=[3]/[2] [5]=[3]/[1] [6] [7]

Customs-specific(RCDP) 140.0 1 140.0 140.0 100.0 45.0

Trade-related 277.8 14 50.9 3.6 18.0 16.0 30.0Infrastructure 210.5 5 8.6 1.7 4.0 3.0 5.0Public finance 229.2 7 100.0 14.3 44.0 32.0 59.0Others 127.9 11 9.6 0.9 8.0 3.0 6.0Total (with

RCDP) 985.4 38 309.2 8.1 31.0 100.0Total (without

RCDP) 845.4 37 169.2 4.6 20.0 100.0

a. The share is estimated in the total approved operations for customs including the RCDP(US$309.2 million).b. The share is estimated in the total approved operations for customs without the RCDP(US$169.2 million).Source: Authors based on World Bank database.

3. The structure of table 7.3 follows Lane’s (1998) framework forthe assessment of fundamentals in customs administration aswell as Gill’s (2000) diagnostic guidelines for revenue adminis-tration.

4. For example, the share of IT costs in customs modernizationin the Philippines Tax Computerization Project and in theTurkey Public Finance Management Project account for approx-imately 52 percent and 82 percent of the total costs of thecustoms components, respectively.

132 Customs Modernization Handbook

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

1982–93 1994–2002 1982–2002

Number Number Numberof of of

Projects Sharea Projects Shareb Projects Sharec

Total Number of Projects with DiagnosticAnalyses 3 17 20

Diagnostic Areas

Institutional Environment Assessment General diagnostics of customs laws and regulations 3 100 16 94 19 95

Planned or ongoing customs reform strategy 3 100 16 94 19 95

Customs administration indicators

EffectivenessService time indicators 0 0 9 53 9 45

Organizational structure and functions 1 33 13 76 14 70

Availability of risk management practice 1 33 3 18 4 20

Number of arriving passengers 1 33 0 0 1 5

Tonnage cleared 1 33 0 0 1 5

Ratio of taxes and duties collected to GDP(buoyancy) 1 33 4 24 5 25

Revenues-collected-to-potential-revenue ratio 1 33 0 0 1 5

EfficiencyEstimated administration costs per transaction 1 33 0 0 1 5

Implementation of harmonized system (HS classification system) 0 0 12 71 12 60

Number of office staff 2 67 2 12 4 20

Size of trade 1 33 5 29 6 30

Valuation procedures 0 0 3 18 3 15

Complexity of rules or procedures 2 67 12 71 14 70

Automated customs procedures 2 67 11 65 13 65

Customs Expertise (Human ResourcesDevelopment)Recruitment processes (selection of administration

management) 1 33 2 12 3 15

Training (formal or on-the-job) 1 33 8 47 9 45

IntegrityOffice facilities 2 67 11 65 13 65

Code of conduct (code published or discussed) 0 0 4 24 4 20

Availability of merit-based promotion 0 0 3 18 3 15

Pay and benefits 2 67 3 18 5 25

Internal control and audit 0 0 2 12 2 10

Description and evaluation of methods to detectcorruption and ensure integrity 0 0 9 53 9 45

a. Share of the total number of TA projects with diagnostic analysis for 1982–93 (3 projects total).

b. Share of the total number of TA projects with diagnostics for 1994–2002 (17 projects total).

c. Share of the total number of TA projects with diagnostics for 1982–2002 (20 projects total).

Source: Authors based on World Bank database.

and the application of a risk-based inspection sys-tem, although this is an important element of theoverall computerization strategy (only 20 percentof projects assessed the existing risk managementpractices). In assessing the customs environment,the majority of projects eluded the diagnostics ofvaluation procedures, which was carried out inonly 15 percent of project preparations.

Integrity and human resources managementreceived relatively light treatment. Few projectsexplicitly analyzed the availability and quality of acode of conduct (20 percent), merit-based promo-tion (15 percent), or pay and benefit packages(25 percent). Only 10 percent of the projects offereda diagnostic of the internal control and audit sys-tems, which form the core institutional settings for

coping with incentives and opportunities for cor-ruption. Instead, many projects limited their diag-nostics to a general description of the availability ofmethods to detect corruption (45 percent), and adescription of office facilities (65 percent). In assess-ing the expertise or status of human resourcesdevelopment, projects largely focused on training(45 percent) but bypassed the critical issue ofrecruitment processes, especially the process ofmanagement recruitment (15 percent).

Project sustainability has to be an important partof pre-project diagnosis. Several issues arise here. Inaddition to the government’s commitment toimplement the project, clarity is needed on how theoperating costs of the agency will be financed afterthe project closes. This is particularly important

Two Decades of World Bank Lending for Customs Reform 133

BOX 7.1 Diagnostic Framework—Three Project-Specific Cases

The Tanzania Tax Administration Project(approved fiscal year 1999; total approvedamount US$40 million) confined its diagnosticsto the qualitative analysis of the problems orweaknesses in the customs administration, butdid not offer detailed quantitative assessments ofits efficiency and effectiveness. The project specif-ically assessed institutional weaknesses relatedto poor management, weaknesses in humanresources development, cumbersome documen-tary requirements coupled with bureaucratic anddiscretionary paper-based procedures, lack ofphysical infrastructure and equipment, out-moded legislative or regulatory base with inade-quate authority and penalty structures, and inef-fective enforcement practices that rely largely onphysical inspection despite the use of a preship-ment inspection (PSI) company.

The Philippines Tax Computerization Pro-ject (approved fiscal year 1993; total approvedamount US$63 million) and the Russia CustomsDevelopment Project (approved fiscal year2003; total approved amount US$140 million)offer examples of more comprehensive diagnos-tics. The diagnosis in the Philippines Tax Com-puterization Project was based on an Inter-national Monetary Fund (IMF) analysis for acustoms reform action plan. Additional diagnos-tic work initiated by the Bank resulted in supple-ments to the IMF recommendations for theaction plan. The project analyzes the existingrevenue system and the institutional capacity ofthe revenue administration. It studies the histor-ical background and the overall reform contextof the computerization project, as well as

describes the status of computerization in cus-toms and the tax administration. It also supple-ments the analysis of the institutional capacitywith statistics on performance of customs andthe tax administration. The specific statistics oncustoms include number of staff, taxes collectedby the Bureau of Customs (BOC), expenses,number of passengers (total and per BOC staff),net tonnage cleared (total and per BOC staff),trade flows (imports and exports values), andtax efforts (defined as the share of tax collectionin gross domestic product).

For the RCDP, the Bank project team devel-oped jointly with IMF customs experts a project-specific diagnostic questionnaire. It was sent tothe State Customs Committee (SCC) before thebeginning of the actual project design work.Information provided by the SCC was analyzedbefore the pre-appraisal of the project, and wassupplemented by additional pre-project diagnos-tic work, using the diagnostic tools designed bythe World Customs Organization (WCO) and theEuropean Union (EU) Blueprints for CustomsAdministrations, in addition to Gill’s diagnostictoolkit. Pre-project diagnosis covered all relevantareas ranging from the analysis of the projectenvironment, commitment to reform, and stake-holder needs and expectations to an assessmentof the needs for legal and regulatory changes,institutional effectiveness and efficiency, humanresources and training issues, and integrityproblems.

Sources: World Bank 1993b, 1999b, 2003.

for projects with a substantial IT component, proj-ects with substantial investment in infrastructure,and projects supporting the introduction of a spe-cial bonus and incentive system for customs staff. Inthe case of the Philippines Tax ComputerizationProject, for example, the project team did notaddress the issue of the cost of ongoing mainte-nance and IT system upgrades until the project clo-sure discussion. Government guarantees to allocateadequate funds to the BOC for replacing outdatedhardware could not be obtained and the status ofcomputerization deteriorated significantly after theclose of the project.

The ability of the customs agency to attract andretain qualified staff is another key issue for thesustainability of a customs reform project. It willdepend on the human resources managementflexibility of the customs agency, in particular theflexibility to create a sufficient number of expertpositions and to offer adequate compensationpackages. Reform efforts to create a more profes-sional customs agency cannot be successful if theagency does not have the flexibility to attract thenecessary number of qualified and motivated staff.This has to be confirmed before the final design ofthe project.

Most of the projects reviewed neglected thequantitative diagnostics of effectiveness in customsadministration. In addition, only one out of twentyprojects with a diagnostic component analyzed thecustoms administration’s cost per transaction, acritical indicator for efficiency in customs adminis-trations. On the other hand, there was a clear evolu-tion in the diagnostic work. Out of 26 TA projectsundertaken during the period 1994–2002, 17 proj-ects conducted some kind of diagnostics. This is insharp contrast with the insignificant share of proj-ects with diagnostics during 1982–93, where onlythree out of twelve TA projects had any kind of pre-project diagnosis. The juxtaposition of the shares ofprojects with individual indicators in the totalnumber of projects with diagnostics in each sub-period reveals an improved quality of the diagnos-tics, except for the area of efficiency assessment.The diagnostics undertaken during 1994–2002were significantly more comprehensive in probingthe fundamental issues of customs operation andmanagement, particularly service time indicators(53 percent in the second subperiod compared tonone in the first), organizational structure and

functions (76 percent versus 33 percent), status ofthe implementation of the harmonized system (71percent versus none), and complexity of rules andprocedures (71 percent versus 67 percent). In addi-tion, the second subperiod marked a substantialevolution in the integrity assessment.5

What are Customs Projects Trying to Achieve?An Analysis of Project Objectives

Table 7.4 summarizes the customs-related objec-tives of the 38 TA projects reviewed. There are threebroad project objectives for customs administra-tion reform: revenue mobilization, minimization ofburden on trade, and national security. More spe-cific project objectives relate to specific projectcomponents or reflect a narrower project focus andare basically subcomponents of the three majorfunctions of customs. They include objectives suchas strengthening integrity or improving services tothe trader community. Many projects list a numberof detailed objectives instead of aiming at generallystrengthening one or several of the core functionsof customs. Some projects simply pursue the broadobjective of strengthening the customs agencywithout mentioning specific effectiveness, effi-ciency, or integrity objectives.

Minimizing the burden on trade emerged as themain target of the 38 projects; more than half theprojects during 1982–2002 broadly had trade facili-tation as the core project objective. Ten projectsidentified revenue enhancement as the main objec-tive. No project incorporated national security in itsobjectives, which is understandable given thatnational security is not part of the Bank’s mandate.The cross-period comparison shows that thedefinition of broader project objectives of tradefacilitation or revenue enhancement became morewidespread in recent years compared to earlier Bankprojects.While only 25 percent of projects identifiedtrade facilitation as their main objective during 1985to 1993, this share jumped to 65 percent for projects

134 Customs Modernization Handbook

5. Projects with pre-project diagnostics during 1982–93 seemedto focus more on the quantitative assessment of effectiveness incustoms administration. Nevertheless, one should be aware ofthe major caveat in this cross-period comparison: the skeweddistribution of the number of projects with pre-project diagnos-tics toward the second period, and the very small sample of justthree projects with pre-project diagnostics in the first periodtend to overestimate the diagnostics shares in the first period.

designed between 1994 and 2002. Similarly, only 8percent of projects designed between 1982 and1993 specified revenue enhancement as a core proj-ect objective. The related share was 35 percent forprojects designed between 1994 and 2002. Bank TAprojects thus seem to reflect and react to the grow-ing awareness in recent years among policymakersin developing countries of the importance of tradefacilitation in general and the importance of cus-toms reform for trade facilitation.

The fact that the majority of projects (27 out of38 projects, or 71 percent) during 1982–2002 listedthe global—and somewhat vague—objective of“strengthening of the customs agency” as a key proj-ect objective indicates a certain reluctance to com-mit to more specific and measurable outcomes.6

However, more recent Bank projects designedbetween 1994 and 2002 witnessed a dramaticchange in the identification of more specific projectobjectives. Moreover, while no project set theimprovement of services to the trader communityas one of its targets during 1982–93, it became a keyobjective for half of the 26 TA projects during1994–2002. No project identified mobilizing thevoice and participation of the private sector, partic-

ularly the trader community, as sufficiently impor-tant to be highlighted as a separate project objective.

Measuring Performance: The Design of Perfor-mance Indicators

Table 7.5 summarizes the coverage of benchmarksor performance indicators used to monitor imple-mentation of the objectives as set out in the proj-ects.7

Measuring performance was particularly weakin the case of projects designed before 1994. Only asingle project designed between 1982 and 1993listed any performance indicators. Performancemeasurement was limited to only two indicators,the release or import clearance time and the annualnumber of declarations per customs staff. Amongmore recent Bank projects, the RCDP, the TurkeyPublic Finance Management Project, the TunisiaExport Development Project, and the Trade andTransport Facilitation Projects in SoutheasternEurope are the ones with the most comprehensivesets of performance indicators.

The selection of performance indicatorsdepends on the objectives and coverage of the TA

Two Decades of World Bank Lending for Customs Reform 135

TABLE 7.4 Summary of Objectives (shares in percent)

Period 1982–93 1994–2002 1982–2002Number Number Number

of of ofObjective Projects Sharea Projects Shareb Projects Sharec

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

a. Share of TA projects during 1982–93 reviewed (12 projects).

b. Share of TA projects during 1994–2002 reviewed (26 projects).

c. Share of TA projects during 1982–2002 reviewed (38 projects).

Source: Authors based on World Bank database.

6. Of the 27 TA projects that included the objective of strength-ening the customs agency, seven listed this objective as the singleobjective for their customs administration reform components.

7. The listing is based on the set of indicators established in theTurkey Finance Management Project and in the seven Trade andTransport Facilitation projects in Southeastern Europe.

136 Customs Modernization Handbook

TABLE 7.5 Performance Indicators

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

Indicator Projects Projects Projects

Revenue collected per customs staff 0 8 8Total customs agency costs compared

to revenue collected 0 7 7Salaries compared to revenue collected 0 7 7Trade volume per number of staff 0 8 8Annual number of declarations per

customs staff 1 9 10

Release time (import clearance time) 1 12 13Physical inspection and introduction of

risk management 0 14 14Trade community information 0 4 4Irregularities per number of examinations 0 8 8Surveyed occurrence of corruption/

integrity 0 2 2More effective physical inspections 0 4 4Rejection of incomplete or inaccurate

declarations 0 1 1Timely and accurate production of

trade statistics 0 2 2

Source: Authors based on World Bank database.

Effi

cien

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ed

Effe

ctiv

enes

s-In

ten

ded

Res

ults

Res

ults

BOX 7.2 Inadequacy of Performance Indicators: Project-Specific Cases

The majority of the TA projects reviewed did notinclude any indicators for measuring project per-formance. For instance, the lack of performanceindicators was highlighted in the OED evalua-tion of the Philippines Tax Computerization Pro-ject, which had a substantial customs reformcomponent. A number of other projects did notprovide an adequate set of performance indica-tors corresponding to the project objectives andactivities. An additional problem faced in projectsupervision was the fact that project documentsfrequently did not offer any explicit time line forachieving the implementation benchmark.

The abstract below from the table entitled“Key performance indicators” shows the indica-

tor for the component “Resource mobilization”of the Armenia Second Structural AdjustmentTechnical Assistance Credit (approved fiscal year1998; total approved amount US$5 million).The project included isolated efforts to comput-erize the State Tax Inspectorate and the CustomsDepartment, but there was no ongoing orplanned strategy for comprehensive reform ofthe customs administration. The project was notbased on a diagnostic analysis to make sure thatthe proposed activity would have a tangibleimpact on revenue collection. As a consequence,the indicator is vague, mixes project output andoutcome, and does not specify when the bench-mark would be reached.

Expected Key Performance Monitoring Indicators Critical AssumptionsOutcomes/Impact Indicators and Supervision and Risks

Customs declaration Customs declarations and Customs department Implementation capacityprocess fully payments processed records of Customs departmentcomputerized and using computerized systempayment systemimproved

Sources: World Bank 1997a, 2000g.

Two Decades of World Bank Lending for Customs Reform 137

project. The broader and more comprehensive acustoms reform project is designed to be , the morecomprehensive the set of performance indicatorsneeds to be. A narrow set of indicators, therefore,can be perfectly justified in the case of a limited TAproject with narrow focus and objectives. However,of the 38 TA projects under review, only 17 (orapproximately 45 percent) had any benchmarks formonitoring and evaluating project implementationand results. A majority of projects were designedwithout an appropriate set of performance indica-tors, and there was a wide variation across projectsin terms of indicator coverage. Chapter 1 of thisbook suggests a number of good indicators formonitoring revenue enhancement. Box 7.2 pro-vides some examples of incomplete sets of per-formance indicators, while box 7.3 highlights agood practice in designing a comprehensive set ofindicators.

Table 7.5 shows that only a small set of the indica-tors on efficiency and effectiveness attracted the focalattention of the project teams. During 1982–2002,

out of 17 TA projects with performance indicators,more than half measured certain aspects of theimprovement in customs service (or effectiveness-intended results) and efficiency in using customsstaff for processing declarations. Thirteen projectspresented benchmarks for the release or importclearance time, and 14 focused on the introductionof risk management practices, while 10 focused onthe indicator of annual number of declarations percustoms staff (efficiency-intended results). A num-ber of other good efficiency indicators—specifically,average revenue collection per customs staff, averagecosts of customs administration in terms of revenuescollected by customs, salaries-to-revenues-collectedratio, and trade-volume-to-staff ratio—attractedfewer than half of the Technical Assistance Loans(TALs) with performance indicators. An even longerlist of critical indicators on effectiveness—such astrader service, number of irregularities-to-numberof examinations ratio, and rejection of incomplete orinaccurate declarations—attracted a substantiallylow number of projects; this may reflect the lack of

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

Seven countries in Southeast Europe (Albania,Bulgaria, Bosnia and Herzegovina, Croatia,Macedonia, Federal Republic of Yugoslavia, andRomania) participate in the regional program forTrade and Transport Facilitation. The program isaimed at modernizing customs administrationsand other border control agencies. To facilitatecoordination, a Regional Steering Committee(RSC) was established. Customs reform was iden-tified as a core requirement to support EU acces-sion, and organizational reforms were combinedwith the provision of infrastructure. EU customsreform blueprints and accession requirementsprovided the basis for the TA program.

A template of a comprehensive set of per-formance indicators was developed and uni-formly applied to pilot ports in all participat-ing countries (with the sole exception of theindicator on surveyed occurrence of corruption,which was only measured by one participatingcountry—Albania). All indicators were devisedon the basis of the existing situation in 1999 andspecified for the subsequent four years. Theyincluded benchmarks for pilot sites clearanceperformance (for example, import clearancetime in minutes, percentage of physical exami-nation, proportion of times that trucks arecleared in less than 15 minutes, share of number

of irregularities in total number of examinations)and those to monitor efficiency and effective-ness-intended results (for example, average rev-enue collection per customs staff, share ofsalaries in revenue collection, average annualnumber of declarations per customs staff).

The fact that the TTFSE program included allborder inspection agencies permitted the designof indicators that measure not only customsclearance time, but also total clearance time atthe border. Projects focusing exclusively on cus-toms operations will find it more difficult to workwith these indicators. However, customs gener-ally has a lead responsibility for coordinationwith other agencies in efforts to reduce importclearance time, and customs reform projectswith a trade facilitation objective may find it use-ful to monitor the development of overall importclearance time throughout the implementationperiod of the project. This can be done byadding to the list of customs-specific key per-formance indicators a small number of broadertrade facilitation indicators, to be monitored forinformation purposes only. This has been donebefore, in the RCDP, for example.

Sources: World Bank 2000a, 2000b, 2000c,2000d, 2000h, 2001, 2002a, 2002b.

138 Customs Modernization Handbook

effectiveness assessment in the pre-project diagnos-tics. It is critical to note that although a significantnumber of projects (10 out of 38 TA projects underreview) set the objective for revenue enhancement(see table 7.4), none ever established a benchmarkfor monitoring.

Key Features of Project Design

Customs modernization is a complex and continu-ous process. It requires long-term commitmentsand a proper strategy for capacity building, whichinvolves the development of systems, procedures,and processes, as well as staff competencies. TheRevised Kyoto Convention on simplification andharmonization of customs procedures has sketchedthe vision of a modern customs organization andhas provided guidelines for a customs reform strat-egy.8 In his book Customs Modernization and the

International Trade Superhighway (1998), Lanedevelops a comprehensive and practical frameworkfor customs reforms. The framework shows a pyra-midal structure with the base consisting of thereform fundamentals (environment, customsexpertise, and integrity) and enablers (analyze data,automate, manage processes), the middle levelincorporating advanced processes (risk manage-ment, audit, compliance, and enforcement), andthe top containing implementation processes (fig-ure 7.1).9 In this chapter, we apply this analyticalframework to survey the design of the Bank’s TAprojects between 1982 and 2002.

Table 7.6 summarizes the scope of customs mod-ernization activities in Bank TA projects. It not onlylists project areas and activities but also includeskey issues in project implementation such assequencing, implementation plan, and coordinationbetween customs administration and other relatedinstitutions. The past two decades have seen a steadyevolution in the Bank’s strategy to modernize cus-toms: The project scope became consistently more

Risk Management

Implement

Audit

Informed Compliance

Improve Enforcement

Ensure Integrity Analyze Data

Customs Expertise Automate

Environmental Assessment Manage Processes

Fund

amen

tals

Adv

ance

dP

rocesses

Enablers

FIGURE 7.1 Institutional Environment Assessment Framework

Source: Lane 1998.

8. The WCO developed the original Convention in 1974 andrevised it in 1999 to adapt to the changing nature of global tradethrough the 1980s and 1990s. The Convention, formally referredto as the International Convention on the Simplification andHarmonization of Customs Procedures, contains the basic prin-ciples for a modern customs administration and offers a blue-print for customs reform.

9. One of the Bank’s projects, the Ghana Trade and InvestmentGateway Project, used this framework in formulating its cus-toms reforms activities.

Two Decades of World Bank Lending for Customs Reform 139

TABLE 7.6 Comprehensiveness of Project Design

1982–93 1994–2002 1982–2002Number Number Number

of of ofProjects Sharea Projects Shareb Projects Sharec

Legislative EnvironmentNew codes or legislationd 0 0 15 58 15 39New tariff structuree 1 8 11 42 12 32Valuationf 1 8 3 12 4 11

Part of planned or ongoing customs reformstrategy 3 25 16 62 19 50

Process ManagementProcess simplification 5 42 22 85 27 71Coordination with other import clearance

agencies 0 0 14 54 14 37Automation 8 67 24 92 32 84Risk management 3 25 18 69 21 55

Management/Human Resources DevelopmentRecruitment procedures 0 0 6 23 6 16Training 7 58 20 77 27 71Salaries 1 8 10 38 11 29Promotion 1 8 4 15 5 13Penalty 0 0 4 15 4 11Code of conductg 0 0 4 15 4 11Other aspects of integrity (facilities, auditing) 1 8 13 50 14 37Customs and revenue department integrationh 0 0 2 8 2 5Informing or educating stakeholders 1 8 15 58 16 42Analysis of data for better compliance and

facilitation 0 0 12 46 12 32

Change Management SustainabilityBenefit package or policy to retain good staff 0 0 3 12 3 8Government budget commitmenti 0 0 9 35 9 24Implementation plan specified 4 33 16 62 20 53Sequencing (explicitly or adequately presented) 1 8 3 12 4 11Monitoring and evaluation (performance

indicators) 1 8 16 62 17 45Project appraisal (financial and economic

appraisal) 2 17 14 54 16 42Bank’s cooperation with other donors in project

preparation or implementation envisaged 2 17 15 58 17 45Project supervision or management staffing

involving IMF, WCO, or UN Conference on Trade and Development 2 17 14 54 16 42

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

140 Customs Modernization Handbook

comprehensive during 1994–2002 compared to1982–93. Despite this trend toward a more compre-hensive approach, projects did not always give suffi-cient importance to certain core reform issues. Keyreform issues that were often neglected are improve-ment of the legislative framework for customs oper-ations, change management, efficient coordinationbetween customs agencies and other import clear-ance agencies, integrity, and sequencing in projectimplementation.

The majority of projects failed to focus suffi-ciently on change management issues. Administra-tive reforms can only succeed in a legal andregulatory environment that permits their fullimplementation. A typical example is the introduc-tion of a risk-based selective physical control sys-tem and of post-release audits, which in manycountries are not possible under the existing Cus-toms Code. However, only 15 out of the 38 TA proj-ects in the sample (39 percent) mentioned the needfor modernizing and revising customs legislation.Most projects did not cover valuation issues in theirdesign: valuation was mentioned in only 11 percentof the projects, which means that the Tokyo Roundand the GATT Agreement on Customs Valuation(ACV) of 1980 were generally neglected.10 Interest-ingly, no projects in the database included a PSI-related component (either strengthening a PSIregime or phasing out PSI) in their design,although PSI regimes were in place in some of theclient countries at the time of project design (thePhilippines and Tanzania, for example).11

There were few projects targeted at change man-agement and sustainability. For example, only threeprojects (8 percent) planned to design a benefitpackage or policy to retain good staff. The RCDP isdistinguished as a project that dealt with this issuemost thoroughly. The human resources compo-nent of the project emphasized developing andimplementing proposals for improving the remu-neration and nonmonetary benefits of customsstaff and managers—the purpose was to improvethe capacity of the State Customs Committee(SCC) to recruit and retain qualified staff.

It is interesting to note that just half of the proj-ects linked the customs component with a plannedor ongoing customs reform strategy. This may beexplained to some extent by the fact that in othercases, the government had not been ready toembark on comprehensive customs reforms.

Except for the RCDP, no project referred to theoriginal WCO or Revised Kyoto Convention in itsproposed customs reform activities. The proposedreform procedures focused primarily on processsimplification—including the introduction ofpost-release audits and account management(71 percent), automation (84 percent), and training(71 percent). Despite the high emphasis onautomation, just slightly more than half of all proj-ects targeted the introduction of risk management(55 percent); this implies that the objective ofautomation was not always well defined and suffi-ciently linked to other critical reform components.An interesting fact is that few projects addressed theissue that customs is only one of several agenciesinvolved in the import clearance process. Theimpact of customs reform measures on the effec-tiveness of the overall import clearance process canbe strengthened considerably by either supportingadditional complementary reforms in other importclearance agencies or at least supporting bettercoordination between the agencies involved inimport clearance. However, only 14 out of the 38projects reviewed emphasized the need for simulta-neous reforms of these institutions and better coor-dination of the clearance process. Box 7.4 presentsthe case of the Tunisia Export Development Pro-ject, which highlights an integrated approach forstreamlining the interagency coordination for han-dling imports and exports. This was also a majorobjective in the Ghana Trade and InvestmentGateway Project.12

The analysis also shows an imbalance in the cov-erage of the various human resources managementissues. While more than two-thirds of the TA proj-ects covered training needs, most projects missedother critical human resources–related determi-nants of both success and sustainability of customsreforms such as recruitment procedures (only listedin 16 percent of the TA projects), salary and benefitstructure (29 percent), or career management

10. The ACV aims for a fair, uniform, and neutral set of stan-dards for valuation to avoid the use of arbitrary or fictitiousvalues.

11. The Tanzania Tax Administration Project identified theexisting issues related to PSI in its diagnostics, but it emphasizedthe PSI-related activities only during supervision missions. 12. See De Wulf (2004).

Two Decades of World Bank Lending for Customs Reform 141

(13 percent).13 Considering that according to cus-tomer surveys customs administrations figureamong the most corrupt government institutionsin many countries, insufficient attention was givento integrity issues, which were not specificallyaddressed in the majority of projects. It was largelyassumed that modernization of customs proce-dures would benefit integrity. Only 11 percent ofthe total TA projects reviewed included a revisionof disciplinary measures and penalties to fight cor-ruption and the development of a code of conduct

in their design; similarly, just 37 percent of theprojects dealt with the introduction or improve-ment of the internal audit system.

While more than half the projects under review(53 percent) specified implementation plans, only11 percent offered explicit and adequate sequenc-ing of the reform activities. Very few projects actu-ally provide an appropriate time line for implemen-tation. A lack of focus on preparing an appropriateimplementation plan can cause serious sequencingmistakes. In the Lebanon Revenue Enhancementand Fiscal Management Technical Assistance Pro-ject, for example, phase one of the ASYCUDAimplementation was scheduled before the begin-ning of the business reengineering exercise, and

13. It is conceivable that the issue of salary cannot be easilyresolved in isolation from overall civil service reforms or estab-lishment of semi-autonomous revenue agencies.

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

The customs reform component in this Bank-sup-ported project (approved fiscal year 1999; totalapproved amount US$34.7 million) is targeted atpromoting trade in general and export in partic-ular, while revenue enhancement is not a specificreform objective. The reforms combine the intro-duction of Electronic Data Interchange (EDI) withprocess simplification, cooperation and partner-ship, risk management, and human resourcesdevelopment. It was proposed that the EDI serverbe developed as a center to transform the exist-ing complex web of manually-based cross-connected exchange of information throughforms and messages among trade stakeholders(customs, banks, shipping agents, traders, cus-toms brokers, freight forwarders, Ministry ofCommerce, and Port Authority)—shown in box

figure 1—to a new direct connection–basedinterrelation among the trade stakeholders (seebox figure 2).

The customs reform component wasdesigned in three subsequent phases. The firstphase targets the simplification of proceduresfor submission of shipping manifests. The sec-ond phase promotes real time automated pro-cessing in responses to customs declarations.Also, post-event auditing techniques and riskmanagement are to be adopted. The third phasefocuses on training customs officers to enablethem to uniformly implement new proceduresand regulations.

Source: World Bank 1999c.

CustomsBrokers

CargoHandling

PortAuthority

Traders

Ministry ofCommerce

Banks

ShippingAgents

EDI Server

Customs FreightForwarders

CustomsBrokers

CargoHandling

PortAuthority

Traders

Ministry ofCommerce

Banks

ShippingAgents

Customs FreightForwarders

Trade document processing—presentsituation

Trade document processing—after imple-mentation of the component

Box figure 1 Box figure 2

142 Customs Modernization Handbook

training for ASYCUDA implementation was sup-posed to start only nine months after the launch ofthe first phase of ASYCUDA (World Bank 1994).

A cross-period comparison reveals consistentprogress in project design, however. While almostall projects designed between 1982 and 1993neglected the need for improving the legal and reg-ulatory environment for customs operations, atten-tion to such issues surged between 1994 and 2002.A substantially higher share of projects designed inthe later period also paid sufficient attention tosuch crucial reform activities as process simplifica-tion (85 percent), automation (92 percent), andrisk management (69 percent). Projects designedbetween 1994 and 2002 showed a significantlyimproved coverage of issues of coordination withother import clearance agencies, integrity, projectevaluation, and customer service. Finally, theBank’s emphasis on cooperation, to various extents,with other donors in project preparation or imple-mentation increased dramatically from 17 percent

during 1982–93 to 58 percent during the1994–2002 (see box 7.5 for project-specific cases).

Project Implementationand Outcomes

This section reviews 22 complete TA projects withcustoms components. Outcomes of the projectimplementation are presented and followed by ananalysis of the factors that affect the outcomes andimpacts of these projects.

Project Implementation, Outcomes, and Issues

Evaluation work has two dimensions. The firstdeals with the lessons learned, and design and per-formance indicators are emphasized. A secondphase should deal with the outcomes of projectsreviewed, identifying elements that affect such out-comes. Of the 38 TA projects reviewed that wereapproved by the World Bank between 1982 and

BOX 7.5 Increased Bank Emphasis on Coordination with Other Donors

Trade and Transport Facilitation Projects inSoutheast Europe. The customs modernizationcomponent in these projects was proposed asthe least costly approach to complement theongoing EU-supported customs reforms in thesecountries. The component used grants from theWorld Bank, EU, and the United States for mosttechnical assistance. In the case of Bosnia andHerzegovina, the EU was committed to provid-ing all technical support for customs reforms.

Donors were active in supporting the imple-mentation and supervision of the projects. Inparticular, all donor representatives participatedin the Regional Steering Committee (RSC) asobservers in overseeing the overall implementa-tion of the program. The active participation ofthe donors was to ensure that the customs mod-ernization component would take full account ofthe ongoing reform efforts. In addition, theUnited Nations Economic Commission forEurope (UN-ECE) provided a secretary for eachcountry RSC member to support the implemen-tation of the program.

Turkey Public Financial Management Pro-ject (approved fiscal year 1996; approvedamount US$62 million). The Bank and the IMFdemonstrated close coordination from the proj-

ect design stage throughout the implementa-tion stage. The Bank engaged the Fiscal AffairsDepartment (FAD) of the IMF to help with theimplementation of the technical components ofthe customs modernization plan. FAD super-vised the customs administration adviser, theinformation technology adviser appointedunder the loan agreement, and the short-termadvisers appointed to provide specific technicalassistance. It was also agreed that FAD wouldmake regular inspection missions (approxi-mately every six months) and assist in assessingthe pilot customs operation.

Bangladesh Export Diversification Project(approved fiscal year 1999; approved amountUS$32 million). The government convinced theWCO that sufficient reform readiness existed tolaunch a WCO Customs Reform and Moderniza-tion Program for Bangladesh as part of theExport Diversification Project. The projectplanned to engage the WCO in customs admin-istration staff training and UNCTAD in installa-tion of ASYCUDA++ and related training.

Sources: World Bank 1995, 1999a, 2000a,2000b, 2000c, 2000d, 2000h, 2001, 2002b.

Two Decades of World Bank Lending for Customs Reform 143

2002, 22 have been closed and permit a review ofimplementation and outcomes.14 This analysis isbased primarily on implementation complementa-tion reports (ICRs) and OED evaluation reports,and to some extent, on project status reports(PSRs).15 ICRs and OED evaluation reports use auniform set of criteria for evaluation and cover pre-project preparation, design, implementation, insti-tutional development impact, sustainability, andperformance by the Bank and the borrower. Anoverview of specific definitions of criteria for OEDevaluation reports is provided in annex 7.B.

We have also attempted to evaluate the imple-mentation of customs components of ongoingprojects. Our suggested rating of ongoing customsreform activities is based largely on internal docu-ments such as mid-term reviews, internal memos,supervision reports, and PSRs. However, a substan-

tial number of projects are not ready for such anevaluation, as they either were just newly approvedand launched, or did not have sufficiently detailedreports on their implementation by the time thischapter was prepared.

Table 7.7 summarizes our suggested rating ofcustoms components for both closed and activeprojects in the form of relative frequency. Theresults indicate that while the majority of rated cus-toms activities were or are being satisfactorilyimplemented, a significant number of projectsreceived low ratings.

To analyze the links between customs compo-nent outcomes and general issues of Bank quality atentry, and Bank and borrower performance, weattempted to estimate a number of correlationcoefficients.16 At the preliminary level, we estimatethe correlation between the suggested rating of cus-toms activities and the OED general rating of over-all projects (panel A, table 7.8). Then we estimatethe correlation of the suggested customs ratingwith the rating of quality of diagnostics and per-formance indicators—two proxies for the quality at

14. Our evaluation of the outcomes of the customs componentsare suggested in the sense that the evaluation is derived from thedescription of the implementation and outcomes of those com-ponents made in ICRs, OED evaluation, and PSRs. Our sugges-tive rating does not reflect the official rating by either the regionsor OED. The rating is applicable to the outcomes of the customscomponents against their performance indicators if they areavailable or against their objectives as established in project doc-uments.

15. Regions prepare ICRs for each lending operation usinginformation and data from project preparation and appraisal aswell as supervision reports. One of the objectives of ICRs is to“reinforce self-evaluations, including development impactassessment, by the Bank and borrowers” (Operations Policy andCountry Services 2003, p. 2). OED, however, provides independ-ent evaluation after the close of the project.

16. Quality at entry reflects the quality of the project design. Thefactors to be considered and rated include project concept,objectives, and approach during identification. The design israted from various perspectives consisting of technical, eco-nomic and financial, environmental, poverty reduction andsocial, institutional, financial management, readiness of imple-mentation, and assessment of risk and sustainability aspects. Fora detailed description of the concept and criteria for rating ofquality at entry, see “OED Evaluation Tools and Approaches” atwww.worldbank.org/oed/oed_approach_summary.html.

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

Closed Projects Ongoing Projects

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

Projects with unrated customs outcomesc 23 50Total 100 100

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

144 Customs Modernization Handbook

entry—for the exclusive customs components(panel B, table 7.8). Annex 7.C explains themethodology and data for the correlation analysis.Table 7.8 shows positive but relatively weak correla-tion between the rating of the customs componentsand the OED general rating of the overall projects,Bank quality at entry, and borrower performance(the correlations range from 0.2 to 0.38). The coef-ficients of correlation between the customs compo-nent rating and Bank overall supervision andperformance are somewhat higher (0.51 and 0.5,respectively).17 The estimates may have beenconfounded by noncustoms components of proj-ects, especially for the cases in which customs mod-ernization is just a small part.

There is a relatively strong link between the qual-ity of diagnostics and design of customs activitiesand their outcomes. Panel B, table 7.8 shows signifi-cant correlation between the suggested rating ofoutcomes of customs components and the twoproxies for quality at entry of the customs compo-nents, specifically the quality of diagnostics and per-formance indicators (0.54 and 0.67, respectively).The results reaffirm the chain of impact from thequality of pre-project diagnostics to design toimplementation of customs modernization activi-ties embedded in the Bank-funded projects.

Factors Affecting Outcomes and Impact

The outcomes and the institutional developmentimpact of a project are dependent upon variousfactors, which, for the purpose of this analysis,are grouped into three major categories: (a) pre-project diagnostics and design, (b) appropriateproject objectives and components, and (c) imple-mentation and change management strategy. Someissues related to the sustainability of project out-comes are incorporated in the third category.

Pre-Project Diagnostics and Design ProblemsThe ICR and OED evaluation reports pinpointed anumber of pre-project preparation and designproblems leading to unsatisfactory implementationof some projects. These problems can be catego-rized as follows:

• Noncomprehensive and isolated reform activities.The review of the 38 TA projects indicates thatthe inclusion of customs components waslargely consistent with the World Bank CountryAssistance Strategies, or overall governmentdevelopment strategies, or both. However, someprojects were targeted only at certain processesor organizational or human resources manage-ment issues without explicit coordination withspecific planned or ongoing customs reforms inthe borrowing country. Only 6 of the 22 com-pleted projects, to different extents, linked thecustoms components with the countries’ overallcustoms reforms. Such a piecemeal and isolated

TABLE 7.8 Correlation Estimation: A Summary

A. Correlation coefficients between suggested rating of customs outcomes and OED selective rating ofprojects overall (OED rating on both customs and noncustoms outcomes)

General Project Bank Quality Bank Bank BorrowerOutcomes at Entry Supervision Overall Overall

Customs outcome 0.38 0.23 0.51 0.50 0.33

Performance Indicators forDiagnostics for Customs Components Customs Components

Customs outcomes 0.54 0.67

Source: Authors based on World Bank database.

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

17. The results obscure the fact that there is strong correlationbetween outcomes of overall projects and their quality of design,Bank supervision, and Bank and borrower performance. Forexample, the correlation between general outcomes of projectsand overall Bank quality at entry is robust at 0.9.

Two Decades of World Bank Lending for Customs Reform 145

approach partly reflects the underestimation ofthe complexity of customs modernization, thelack of recognition of existing institutional bar-riers to reforms, and a lack of experience indesigning customs reform projects.

• Design mismatch between proposed reform activi-ties and level of funding, and insufficient coordi-nation with other donors. Some projects provedto be too ambitious in their coverage in the faceof a clear lack of funding. Project design andimplementation became troublesome, especiallywhen there were no apparent efforts to coordi-nate the technical assistance with other donorsor to incorporate the project into a long-termBank assistance strategy. Donor coordinationwas exercised in only 5 of the 22 closed projects.

• Mismatch between project design and governmentinterest. In some cases, the government’s objec-tives and interests were not properly taken intoaccount in the project preparation and design.A government commitment to support thereforms was assumed, but assumptions in cer-tain instances did not reflect the reality. As aresult, lack of government commitment nega-tively affected the project even in the earlieststages of implementation.

• Hurried preparation without proper analysis. Anumber of projects were designed without diag-nostic analysis or failed to pay attention to theproper sequencing of activities.

Box 7.6 illustrates the problems with someproject-specific cases.

Amendments to Objectives and ComponentsThe review of the 22 closed TA projects reveals that,while a large majority of projects (65 percent) didnot change specified objectives, more than half(approximately 55 percent) revised their compo-nents.18 The revision of objectives or reshuffle offunding or modification of components of a projectdoes not necessarily mean that the project designwas inappropriate. There are basically two types ofdevelopments leading to a change in the set objec-tives or components. The first includes unexpectedchanges in the project environment regardless ofthe quality of the pre-project diagnostics and the

project design. The second is triggered duringimplementation and becomes necessary to adjustfor poor component design. For the success andsustainability of a project, problems of the secondtype should be avoided, but it is nonetheless betterto make necessary modifications to project compo-nents than to stick to an original bad design. Box 7.7illustrates some specific issues that have caused thechange of project objectives or components.

Project Implementation and Change Manage-ment The following main reasons have beenidentified for failures in project implementationand change management to sustain the outcomesof the project: (a) weak project management (bythe Bank and the client government) and supervi-sion;19 (b) lack of ownership, commitment, andaccountability; (c) inadequate coordination withother donors; and (d) lack of a change manage-ment strategy for sustainability. Box 7.8 illustratesmajor implementation management problems.

Main Conclusions and Lessons forFuture Bank Operations to SupportCustoms Modernization

Customs reform has been addressed in Bank proj-ects from very different angles. Customs reform hasbeen covered as one of many elements of invest-ment and technical assistance or structural adjust-ment projects. Support for customs reform hasbeen granted in the context of a broader public sec-tor reform objective recognizing that customs is amajor and powerful government institution, whichin many countries faces serious integrity problems.Even with the reduction of trade taxes and tariffrates, customs remains a key institution for secur-ing revenue collection, given its crucial role inadministering the VAT. Customs reform has alsobeen included in trade facilitation operations, givenits importance in the export and import process.Finally, customs reforms have been included ininfrastructure improvement projects, in particularport rehabilitation projects, to support the mainobjectives of these projects.

19. The review of the completed projects indicate some typicalproblems in the borrower’s performance in customs moderniza-tion, including the lack of coordination between customs andother related agencies, and frequent change of customs manage-ment that puts continuity in efforts for reform at risk.

18. The shares are estimated on the basis of a subsample of 20complete projects because the ICRs for two projects were still inprogress when the chapter was written.

146 Customs Modernization Handbook

Comprehensive capacity-building projects tar-geting customs administrations specifically are theexception and not the rule in Bank operations.Bank projects tend to focus both in the pre-projectdiagnostics as well as in the project design onspecific elements of customs organization, manage-ment, or processes. Project staff appeared insuffi-ciently aware that organizational design, manage-

ment, and procedural issues of other than the targetelements are interrelated with, and dependent fortheir good operation on, a coherent set of processchanges. Thus, these projects ran the risk of under-estimating the complexity of customs reform andthe comprehensiveness in the reform approachrequired to achieve sustainable results. A partialapproach to customs reform, therefore, jeopardizes

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

Argentina Public Sector Management Techni-cal Assistance Project (approved FY86;approved loan amount US$18.5 million; cus-toms reform component approved loanamount: US$ 2.4 million; suggested customsoutcome rating: UNSAT). This project illustratesthe mismatch between ambitious design andfunding level. While all ratings of the project as awhole were favorable—except for the unsatisfac-tory rating of the borrower’s performance—thecustoms component clearly failed. The ICR lists anumber of problems:

• Defined project objective—strengthening thecapacity of the National Customs Administra-tion to collect import duties and export taxes,to simplify export procedures, and to provide astatistical base for monitoring exports—wereoverly ambitious while the level of commitmentto real reform of the customs system was notapparent at the time. Funding was insufficientwith just US$900,000, and the project wasprepared without a clear mandate in govern-ment to carry out profound reforms.

• Lack of clarity of the initially proposed list ofactivities, substantive disagreements as to theappropriate direction for activities, and anearly decision to use the French model as a ref-erence for the reform of the Argentine Cus-toms Administration, which met serious resist-ance from within the Coordinating Unitindicate a lack of careful preparation of theproposed activities and costs. The project fail-ure was attributed to the narrowing of thescope of the project component to diagnosticactivities and the preparation of a new pro-gram on the modernization and reorganiza-tion of Customs. A majority of funds weretherefore reallocated. Ultimately, the projectmanaged to absorb only US$77,616 for theautomation of the National Customs Adminis-tration.

The Philippines Tax Computerization Pro-ject (Customs reform component approved loanamount: US$20.3 million; suggested customsoutcome rating: SAT). The quality at entry for allproject components was rated as unsatisfactory.Although the final outcome of the project forthe customs modernization component wasrated as satisfactory, the ICR and OED high-lighted the following shortcomings in designingthe customs activities:

• Underestimated the difficulties of customs soft-ware development and maintenance venturesfor the BOC. The Staff Appraisal Report (SAR)failed to diagnose properly the risk in the over-all project implementation. It discounted therisk that the project might not be able to retainadequately trained and qualified staff; instead,it predicted that massive training programswould lessen the risk. In addition, the SARunderestimated the institutional constraints(civil service salaries, for example) to the proj-ect implementation and sustainability.

• The SAR did not include performance bench-marks.

• The SAR underestimated the change manage-ment needed for an agency modernizationeffort of this large scale. Specifically, the SARdid not explicitly link the project with the needfor each agency to modernize, reorganize, andreengineer business processes prior to com-puterization. Nor did it recognize the need toimprove the quality and efficiency of commu-nication among the Bureau of Internal Rev-enue, BOC, and the Department of Finance. Itis particularly interesting that these problemsoccurred in the design process, even thoughthe diagnostics clearly identified problemswith administration and communication.

Sources: World Bank 1993a, 2000f, 2000g.

Two Decades of World Bank Lending for Customs Reform 147

the expected efficiency and effectiveness gains incustoms operations, and places sustainability atrisk. Other weaknesses in the projects reviewed arerelated to the ad hoc nature of the diagnostic work,the insufficient attention given to performanceindicators, inadequate attention to proper sequenc-ing of project components, and commitment ofgovernment to provide adequate funding to sustainthe project’s achievements, particularly withrespect to IT maintenance and upgrading. Projectstoo often considered customs as an isolated link inthe trade logistics chain, so that progress achievedin customs often did not translate to overall tradefacilitation given the dysfunctionalities of othertrade-related agencies and infrastructure services.

The review highlights that project preparationand design have substantially improved in the

1990s, and there are a number of more recent cus-toms reform projects that can serve as guides togood practice.

In 1999 the Bank’s Tax Policy and Tax Adminis-tration Thematic Group published a Policy ResearchWorking Paper on “Reforming Tax Systems: TheWorld Bank Records in the 1990s.” This paperincludes a number of suggestions to improve Bankassistance for revenue administration reform, cover-ing both tax and customs administrations. Thesuggestions given in this paper remain relevant andare repeated in annex 7.D. Based on this review it isnow possible to add several other customs-specificrecommendations:

• When preparing a customs reform TA project,the standards of the Revised Kyoto Convention

BOX 7.7 What Triggered the Modification of Project Objectives orComponents

Tanzania Port Modernization Project II(approved fiscal year 1990; approved amountUS$37 million; customs reform componentapproved loan amount: US$2.0 million;, sug-gested customs outcome rating: SAT). The mainoriginal objective of the project was to expandthe physical, managerial, and operational capa-bilities of the Tanzania Harbors Authority (THA)to meet the traffic volume expected in the1990s. The project was intended to provide tech-nical assistance to customs for introducing asimplified documentation process, computeriza-tion, and training of customs officers. Theproject, however, revised its objectives for tworeasons—the establishment of a new semi-autonomous revenue agency, the Tanzania Rev-enue Authority (TRA), and the promotion ofregional integration that triggered the need toprovide support for customs and transit controls.With the establishment of the TRA in 1994, theDevelopment Credit Agreement in 1995 added asentence highlighting the need for strengthen-ing and streamlining the TRA. In addition, theproject added an additional component forreforming the customs wing in the TRA, focusingon rehabilitation and strengthening of borderstations and their computerization.

Mozambique First Road and CoastalShipping Project (approved fiscal year 1992;amount approved: US$74.3 million; customsreform component approved loan amount:US$0.8 million; suggested customs outcome rat-ing: SAT). The project modified its components

during the implementation to reflect the newenvironment and to compensate for an omissionof a key project component in the projectdesign. Specifically, in 1994, following the estab-lishment of a Customs Restructuring TechnicalUnit (UTRA) in the Ministry of Planning andFinance, the Customs and Trade FacilitationActivity, which was under the Small Ports andCoastal Shipping Component, emerged as aseparate component managed directly byUTRA. The restructuring of customs operationsrequired adequate staff training. However, atraining component was omitted in the projectdesign stage and therefore was added duringproject implementation. The modification con-tributed to the success of the customs compo-nent. All key performance benchmarks for cus-toms as projected in the last Project SupervisionReport were achieved, and import duty rates ofcollection increased from 6 percent in 1996 to11 percent in 1999.

The Philippines Tax Computerization Proj-ect. The project added one objective to meetthe new emerging demand for better communi-cations: A system called FINLINK was set up forthe Department of Finance to communicatewith other government agencies responsible fortax collection and fiscal management (Bureau ofInternal Revenue, BOC, Bureau of Trade, CentralBank, Land Registration Authority, and others).

Sources: World Bank 2000e, 2000f, 2000g,2000i.

148 Customs Modernization Handbook

should be used to the extent possible as bench-marks for expected project results. As discussedin chapter 3, the Revised Kyoto Convention pro-vides important guidelines for the design andoperation of a modern and efficient customsorganization.

• Diagnostic work would benefit from drawing onexisting tools for the assessment of strengths andweaknesses of customs administrations.

• A comprehensive set of performance indicatorswith practical benchmarks must be developed tomonitor project implementation. These indica-tors should cover both efficiency and effective-ness of customs reform activities.

• Customs is only one of several import andexport clearance agencies. Reform projectsshould make an extra effort to include theseother agencies in the analysis and investigate thepossibilities of streamlining the overall clearanceprocess. Improving the coordination betweencustoms and other agencies would be a criticalcost effective approach to enhance the clearanceprocess and to strengthen enforcement.

• Specific, partial customs reform components ofbroader, noncustoms-focused TA projects canbe justified. However, the project preparationand design need to make sure that a sufficientlycomprehensive institutional diagnosis has beencarried out, that the specific reform activities

supported by the project are linked to a moregeneral and long-term customs reform strategy,and that the implementation of this componentis adequately monitored.

• The Bank had until recently limited in-houseexpertise and staff capacity to prepare andsupervise customs reform projects. Cooperationwith other multilateral agencies with specificexpertise in customs reform, in particular theIMF and WCO, should be strengthened to facili-tate high quality project preparation and super-vision. In fiscal year 2004, the Bank strengthenedits in-house expertise in the customs area.

• To improve the chances of achieving sustainableoutcomes, government commitment to financefollow-up costs after project closure, relating toIT and infrastructure maintenance and replace-ment costs in particular, should be sought earlyin the project preparation stage.

• Considering the high incidence of corruption incustoms administrations, special attention mustbe given to designing an anticorruption strategyas part of a comprehensive customs reform TAproject. Yet it should be recognized that integrityis not built by standalone integrity actions.Integrity is largely the outcome of the efficientapplication of good procedures consistent withthe Revised Kyoto Convention. Integrity-specificmodules of the project design need to be

BOX 7.8 Implementation Management Issues: The Case of the SenegalDevelopment Management Project

The Senegal project (approved fiscal year 1988;approved amount US$17 million; customsreform component approved loan amount:US$2.2 million; suggested customs outcome rat-ing: UNSAT) failed in all rating criteria in bothICR and OED evaluations. For the customs-specific component, the training of customs staffwas conducted in an ad hoc manner in theabsence of a needs assessment and a coherentpolicy to link training to job effectiveness. Inaddition to other design problems, especiallythe mismatch between the scope of the projectand borrower commitment, multiple—andcombined—shortcomings led to the poor pro-ject outcomes:

Frequent changes in project managementand poor supervision coordination. Over theeight-and-half-years of the project, six differenttask managers were responsible for the projectand 11 supervision missions were made with

significant differences in the understanding ofthe project objectives.

Poor quality of supervision assessment.Weak supervision failed to catch problems andto suggest timely modifications. In fact, supervi-sion ratings on development objectives andinstitutional development remained high in spiteof serious problems.

Inadequate action by Bank management.During the implementation, Bank managementignored warnings from staff pointing at the lackof commitment of the government of Senegal;and failed to object to the continued favorableratings on development objectives and institu-tional performance, while it became obviousthat progress was slow and limited.

Sources: World Bank 1997b. OED EvaluationSummary 2004.

Two Decades of World Bank Lending for Customs Reform 149

dovetailed to this overall customs modernizationmodel, and can make a substantial contribution.

• The importance of change management shouldnot be underestimated and a sufficiently highbudget should be allocated to change manage-ment activities.

• The borrower’s political commitment at the topand commitment by the customs administrationshould be more clearly sought and expressed.

• Donor coordination in the design stage of a cus-toms modernization and reform process has avery high payoff.

• The definition of an exit strategy is important toensure sustainability of the reform. Once themoneys of an operation are fully disbursed, theBank signs off and no additional resources forensuring sustainability materialize. Therefore, itis critical to build bridges with the private sectorto ensure sustainability of the reform process.

Annex 7.A Distribution of Projectswith Customs Components byRegion, 1982–2002

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

Distribution of Technical Assistance Projects

Fiscal Year 1982–86 1987–91 1992–96 1997–2002 1982–2002

Number of Number of Number of Number of Number ofRegion Projects Share Projects Share Projects Share Projects Share Projects Share

Sub-SaharanAfrica 1 33 5 71 3 38 2 10 11 29

East Asia andPacific 1 13 1 5 2 5

Europe andCentral Asia 1 14 3 38 12 60 16 42

Latin AmericaandCaribbean 2 67 1 14 2 10 5 13

Middle Eastand NorthAfrica 1 13 1 5 2 5

South Asia 2 10 2 5

Total 3 100 7 100 8 100 20 100 38 100

Distribution of Structural Adjustment Projects

Fiscal Year 1982–86 1987–91 1992–96 1997–2002 1982–2002

Number of Number of Number of Number of Number ofRegion Projects Share Projects Share Projects Share Projects Share Projects Share

Sub-SaharanAfrica 1 20 7 37 13 45 8 31 29 37

East Asia andPacific 1 20 1 5 3 10 1 4 6 8

Europe andCentral Asia 2 7 10 38 12 15

Latin AmericaandCaribbean 8 42 7 24 2 8 17 22

Middle Eastand NorthAfrica 2 40 2 11 3 10 5 19 12 15

South Asia 1 20 1 5 1 3 3 4

Total 5 100 19 100 29 100 26 100 79 100

Source: Authors’ calculations.

150 Customs Modernization Handbook

Annex 7.B Selected Criteria forOED Project Evaluations

The following is a summary of the indicators use byOED (see OED 2004) for evaluating projects aftercompletion, using an objectives-based approach.

Relevance of Objectives. The extent to which theproject’s objectives are consistent with the country’scurrent development priorities and with currentBank country and sectoral assistance strategies andcorporate goals (expressed in Poverty ReductionStrategy Papers, Country Assistance Strategies, Sec-tor Strategy Papers, Operational Policies).

Efficacy. The extent to which the project’s objec-tives were achieved, or expected to be achieved,taking into account their relative importance.

Efficiency. The extent to which the projectachieved, or is expected to achieve, a return higherthan the opportunity cost of capital at least costcompared to alternatives.

Outcomes. The extent to which the project’smajor relevant objectives were achieved, or areexpected to be achieved, efficiently.

Sustainability. The resilience to risk of net bene-fit flows over time.

Institutional Development Impact. The extent towhich a project improves the ability of a country orregion to make more efficient, equitable, and sus-tainable use of its human, financial, and naturalresources through (a) better definition, stability,transparency, enforceability, and predictability ofinstitutional arrangements or (b) better alignmentof the mission and capacity of an organization withits mandate, which derives from these institutionalarrangements, or both. IDI includes both intendedand unintended effects of a project.

Bank Performance. The extent to which servicesprovided by the Bank ensured quality at entry andsupported implementation through appropriatesupervision (including ensuring adequate transi-tion arrangements for regular operation of theproject).

Borrower Performance. The extent to which theborrower assumed ownership and responsibility toensure quality of preparation and implementation,and complied with covenants and agreements,toward the achievement of development objectivesand sustainability.

Annex 7.C Correlation Estimation

The correlation coefficient measures the associa-tion between two variables. It is unit free and henceinsensitive to the unit of measurement of the twovariables. The following formula is used to calcu-late the coefficient of correlation between x and yfor a sample.

Where, is the sample covariance between x and y,and is estimated as

(N is the number of observations in the sample,and , are the means of x and y respectively.)

The standard deviations of x and y, respectively,are and . Note, a sample standard deviation of avariable (x, for example) is the square root of sam-ple variance estimated as follows:

To specify the relationship between outcomes ofcustoms components and selected OED ratings ofthe general quality at entry and overall projectimplementation as well as the impact of quality ofpre-project design and design of specific customsmodernization activities on customs outcomes, weestimate a series of correlation. The data include (a)our suggested rating of outcomes of customs com-ponents and quality of diagnostics and performanceindicators applicable to the customs components,and (b) OED rating of overall outcomes of projects,Bank quality at entry, Bank supervision, and overallBank and borrower performance.

Our ratings of the outcomes of customs compo-nents, the customs diagnostics, and performanceindicators are suggested on the basis of the projectdocuments and any available Bank midterm review,internal memos, supervision report, projectappraisal documents, ICR, or OED evaluation doc-uments. The set of correlations between customsoutcomes and the OED overall project rating is

estimated from the sample of 22 completed pro-jects. However, the correlation between customsoutcomes and quality of customs diagnostics andperformance indicators is estimated from thecombined set of completed and ongoing proj-ects. Projects with nonrated customs componentsare removed from the samples used to estimatecorrelation.

There are six levels of rating applicable forcorrelation estimation: highly satisfactory, satisfac-tory, moderately satisfactory, moderately unsatis-factory, unsatisfactory, and highly unsatisfactory.To estimate correlations, we assign numeric codesto the ratings that range from 1 to 6, with 6 given toa highly satisfactory rating and 1 given to a highlyunsatisfactory rating. The coding is set consistentlyacross all variables.

Annex 7.D Reforming Tax Systems:The World Bank Record in the1990s

The following excerpt from Barbone and others(1999) provides suggestions for improving WorldBank assistance for revenue administration reform.The suggestions are relevant for both tax and cus-toms reform projects.

Diagnosis

1. Pre-project diagnostic work should be basedon a comprehensive framework that pays suffi-cient attention to institutions in addition totraditional concerns of tax administrators. Ide-ally, a single but flexible framework should beadopted throughout the Bank.

2. Diagnostic performance measurement shouldbe done, where possible, quantitatively accord-ing to standard indicators and against prefer-ably cross-country benchmarks.

3. Pre-project work should also include a review(or citation) of the key determinants of goodadministration and project implementation.

Design

4. Project design should be based on a strategicvision of the administration, and pay adequateattention to good governance, but should, nev-ertheless, be limited in scope given a country’s

implementation capacity. Alternative designsand sequencing should be analyzed and theirrationale provided.

5. To generate long-term lessons, projects shouldspecify hypotheses being tested.

Performance Indicators

6. A standard set of outcome performance (effec-tiveness, efficiency, accountability) indicatorsfor tax and customs administrators should bespecified, to be drawn on for all projects.

7. Diagnostic work should give rise to pre-projectbase values of performance indicators for out-come assessment.

8. Outcome performance indicators for projectsshould not only permit project performance tobe tracked, but should be chosen to permithypotheses to be evaluated.

9. The use of taxpayer surveys should be anintegral part of both diagnostic work and per-formance appraisal if not precluded by costconsiderations.

10. Standard guidelines for quantitative input,process, and output indicators should be laiddown and mandated.

Appraisal

11. A standard, quantitative appraisal frameworkor tool needs to be developed for tax adminis-tration projects. If possible, this should belinked to an economic impact assessment, anda model such as the 1-2-3 model developed byDEC should be incorporated in this tool.

12. The tool should be designed to allow for riskassessment and sensitivity to key parameterslike shadow values.

Post-Project Evaluation

13. The use of performance indicators specified inthe project is essential if the evaluation is tohave comparability across projects.

14. The assignment of outcome, sustainability,institutional development, and Bank–borrowerperformance rankings should, as far as possi-ble, be based on the quantitative indicatorsspecified.

Two Decades of World Bank Lending for Customs Reform 151

152 Customs Modernization Handbook

Operations Policy and Country Services. 2003. Guidelines forPreparing Implementation Completion Reports. Washington,D.C.: The World Bank.

World Bank. 1993a.“Argentina Public Sector Management Tech-nical Assistance Project.” ICR Report No. 12124. June 30.Washington, D.C.

——— 1993b. “The Philippines Tax Computerization Project.”Staff Apraisal Report, No. 11355-PH. Washington, D.C.

——— 1994. “Lebanese Republic Revenue Enhancement andFiscal Management Technical Assistance Project.” ReportNo. P-6374-LEB. June 10. Washington, D.C.

——— 1995. “Republic of Turkey— Public Financial Manage-ment Project.” Report No. 14656-TU, vol. 3. Washington,D.C.

——— 1997a. “Armenia—Second Structural Adjustment Tech-nical Assistance Credit.” Project Information Document No.5430. Washington, D.C.

——— 1997b. “Senegal—Development Management Project.”Report No. 17247. Washington, D.C.

——— 1998. “Senegal Development Management Project.”OED Evaluation Summary. February 24. Washington, D.C.

——— 1999a. “Bangladesh—Export Diversification Project.”Report No. 19250. Washington, D.C.

——— 1999b. “Tanzania—Tax Administration Project.” ReportNo. 17713. Washington, D.C.

——— 1999c. “Tunisia—Export Development Project.” ReportNo. 18778. Washington, D.C.

——— 2000a. “Albania—Trade and Transport Facilitation inSoutheast Europe Project.” Report No. 20828. Washington,D.C.

——— 2000b. “Bulgaria—Trade and Transport Facilitation inSoutheast Europe Project.” Report No. 20036. Washington,D.C.

——— 2000c. “Croatia—Trade and Transport Facilitation inSoutheast Europe Project.” Report No. 20459. Washington,D.C.

——— 2000d. “Macedonia—Trade and Transport Facilitationin Southeast Europe Project.” Report No. 20493. Washing-ton, D.C.

——— 2000e. “Mozambique First Roads and Coastal ShippingProject.” Report No. 20682. June 29. Washington, D.C.

——— 2000f. “Philippines Tax Computerization Project.” ICRReport No. 20554. June 29. Washington, D.C.

——— 2000g. “Philippines Tax Computerization Project.” OEDEvaluation Report: August 16. Washington, D.C.

——— 2000h. “Romania—Trade and Transport Facilitation inSoutheast Europe Project.” Report No. 20407. Washington,D.C.

——— 2000i. “Tanzania Port Modernization Project II.” ReportNo. 21559. December 28. Washington, D.C.

——— 2001. “Bosnia and Herzegovina—Trade and TransportFacilitation in Southeast Europe Project.” Report No. 20714.Washington, D.C.

——— 2002a. “Russian Federation—Customs DevelopmentProject.” Report No. 24232. Washington, D.C.

——— 2002b. “Yugoslavia—Trade and Transport Facilitation inSoutheast Europe Project.” Report No. 23888. Washington,D.C.

——— 2003. “Russian Federation Customs Development Pro-ject.” PAD Report No. 24690-RU. March 12. Washington,D.C.

15. To facilitate the knowledge-gathering andhypothesis-testing role of projects (lessonslearned), greater involvement of academic con-sultants could be desirable in diagnostic,design, and evaluation phases.

Further Reading

Barbone, Luca, Arindam Das-Gupta, Luc De Wulf, and AnnaHansson. 1999. “Reforming Tax Systems: The World BankRecord in the 1990s.” Policy Research Working Paper 2237.Washington, D.C.: The World Bank.

European Commission Directorate General XXI, Taxation andCustoms Union. 1998. Blueprints to Improve the OperationalCapacity of Customs Administrations of Candidate Countries.Brussels: European Commission.

Gill, Jit B. S. 2000. “A Diagnostic Framework for RevenueAdministration.” World Bank Technical Paper No. 472.Washington D.C.: The World Bank. Available at www1.worldbank.org/publicsector/tax/DiagnosticFramework.pdf.

Lane, Michael H. 1998. Customs Modernization and the Interna-tional Trade Superhighway. Westport, Conn.: QuorumBooks.

OED. 2004. OED Evaluation Tools and Approaches. WashingtonD.C.: The World Bank. Available at www.worldbank.org/oed/oed_approach_summary.html

Operations Policy and Country Services. 2003. Guidelines forPreparing Implementation Completion Reports. WashingtonD.C.: The World Bank. Available at http://opcs.worldbank.org/opcil/icrguide.html.

Raven, John. 2001. Trade and Transport Facilitation—A Toolkitfor Audit, Analysis and Remedial Action. Washington, D.C.:The World Bank. Available at www.worldbank.org/trans-port/publicat/twu-46.pdf.

World Customs Organization. 1998. “Integrity and CustomsAdministration: A Self-Assessment Guide, ‘Putting the WCOArusha Declaration into Action.’” Malacca, Malaysia.

References

Barbone, Luca, Arindam Das-Gupta, Luc De Wulf, and AnnaHansson. 1999. “Reforming Tax Systems: The World BankRecord in the 1990s.” Policy Research Working Paper 2237.Washington, D.C.: The World Bank.

De Wulf, Luc. 2004.“TradeNet in Ghana: Best Practice in the Useof Information Technology.” In Luc De Wulf and José B.Sokol, eds. Customs Modernization Initiatives. Washington,D.C.: The World Bank.

Gill, Jit B. S. 2000. “A Diagnostic Framework for RevenueAdministration.” World Bank Technical Paper No. 472.Washington D.C.: The World Bank. Available at www1.worldbank.org/publicsector/tax/DiagnosticFramework.pdf.

Lane, Michael. 1998. Customs Modernization and the Interna-tional Trade Superhighway. Westport, Conn.: QuorumBooks.

Operations Evaluation Department. 2004.“Evaluation Tools andApproaches.” Washington, D.C.: The World Bank. www.worldbank.org/oed/oed_approach_summary.html.

153

Part III

Guidelines on Issuesthat Affect Customs’

Operational TradeFacilitation

155

8CUSTOMS VALUATION

IN DEVELOPING COUNTRIESAND THE WORLD TRADE

ORGANIZATIONVALUATION RULES

Adrien Goorman and Luc De Wulf

TABLE OF CONTENTS

Significance and Historic Overview of CustomsValuation 156

The Agreement on Customs Valuation: AnIntroduction 158

ACV Implementation in DevelopingCountries 161

Toward Better Customs Valuation Practices 163

Preshipment Inspection Companies and OtherRelated Services Programs 168

Operational Conclusions 174

Annex 8.A Decision Regarding Cases WhereCustoms Administrations HaveReasons to Doubt the Truth orAccuracy of the Declared Value 175

Annex 8.B Agreement on Customs Valuation:Implementation Requirements 175

Annex 8.C Implementation Issues Related toWTO Bodies Under the Doha

Ministerial Decision onImplementation-Related Issues andConcerns 177

Annex 8.D PSI Programs Operated by Membersof the IFIA PSI Committee 178

Annex 8.E Checklist for Customs Valuations 180

Further Reading 180

References 180

LIST OF TABLES

8.D.1 PSI Programs Operated by Members of theIFIA PSI Committee 178

LIST OF BOXES

8.1 Peru: Import Verification Program 169

8.2 PSI Contract in Madagascar IntroducesTargeted and Evolving VerificationServices 173

principal factors minimizing the efficiency of thecustoms administrations in many developingcountries. The absence of effective customs valua-tion systems affects the outcome of a country’s cus-toms and trade policies, endangers its revenue

Special thanks for the valuable comments received from Ms. LeeDeegan of the Australian Customs and previously of the WorldCustoms Organization.

The lack of understanding of customs valuationand of its supporting procedures are two of the

mobilization performance, and aggravates integrityissues. Customs valuation systems have been thesubject of international agreements because theycan constitute barriers to trade. The World TradeOrganization (WTO) Agreement on Customs Valu-ation (ACV) mandates the use of the ACV for allWTO members. The ACV establishes that the cus-toms value of imported goods, to the greatestextent possible, is the transaction value, that is, theprice actually paid or payable for the goods. Despitereceiving substantial technical assistance (TA),many developing countries have not succeededin adequately implementing the WTO valuationstandard.

A full appreciation of the central issue of thischapter—the difficulties that many develop-ing countries find in implementing the ACV,together with measures that could overcome thesedifficulties—requires a good understanding of thecomplex nature of customs valuation and the con-straints developing countries face in the practice ofcustoms valuation. This chapter, therefore, brieflynotes the nature and significance of customs valu-ation systems and practices and their internationalstandardization. It provides insights into the diffi-culties experienced by developing countries in cus-toms valuation and in implementing the ACV.It also examines the type of measures that couldcontribute to effective valuation of import ship-ments. The first section highlights the significanceof customs valuation and its historical develop-ment. The second section reviews the main char-acteristics of the ACV. The third section deals withthe problem of ACV implementation in develop-ing countries. The fourth section proposes meas-ures to address these problems. The fifth sectionreviews the role of PSI services and other pro-grams in the customs valuation area. The final sec-tion provides the key operational conclusions ofthe chapter.

Significance and Historic Overviewof Customs Valuation

Most import tariffs are based on ad valorem duties,that is, a rate expressed as a percentage of the valueof the imported good. Customs valuation is thedetermination of the amount upon which the rate

of duty is calculated.1 While these rates are unam-biguously fixed by statute in a tariff schedule, thedeclared value of imported goods may differ fromtransaction to transaction. This has three impor-tant implications for tariff policy. First, an importermay engage in underinvoicing and not declare thefull value of the shipment to reduce his duty liabili-ties. Unless the underinvoicing is detected, govern-ment revenue is lost, and the importer receives anunfair advantage compared to its competitors. Sec-ond, governments can take advantage of the valua-tion system to increase or decrease duty liabilitiesfor revenue or protective purposes, thereby offset-ting tariff concessions made under multilateral orbilateral trade agreements. Third, undervaluationand overvaluation are used for capital flight.

For these reasons, a valuation standard is neededboth at national and international levels to ensurethat the correct duty is levied and a level playingfield exists for all importers. It is also needed toenhance transparency and predictability of interna-tional transactions. Good valuation standards andpractices enhance trade facilitation and contributeto the preparation of good trade statistics.

International Valuation Standards

Customs valuation systems have been the subject ofa number of international harmonization and stan-dardization efforts. International efforts towardharmonization began in the early 20th century, butsignificant results did not come until the 1947 Gen-eral Agreement on Tariffs and Trade (GATT). ThisAgreement was followed by the 1950 Conventionon the Valuation of Goods for Customs Purposes,establishing the Brussels Definition of Value (BDV)and the 1979 Agreement on Implementation ofArticle VII of the GATT (ACV), resulting from theTokyo Round. At the 1994 Uruguay Round, a deci-sion (based on Article 17 of the GATT ValuationAgreement) was reached regarding the cases wherecustoms administrations have reasons to doubt thetruth or accuracy of the declared value.

156 Customs Modernization Handbook

1. When tariffs are based on specific duty rates, that is, a givenamount of duty per unit of good, value does not have an impacton the duty. Thus, value determination is not needed for assess-ing duties, although valuation is required for statistical purposesand for nonduty charges.

Valuation Principles: Article VII of the GATT Thefirst significant international agreement on customsvaluation was reached at the 1947 GATT negotia-tions that established principles to be adhered to bytrading partners. These principles, embodied inGATT’s Article VII, emphasize that customs valueshould not be arbitrary, fictitious, or based on valueof indigenous goods. It should be real and based onthe actual value of the imported goods or like goods.Customs value should derive from a sale or offer ofsale in the ordinary course of business under fullycompetitive conditions. If the actual value is notascertainable, customs value should be based on thenearest ascertainable equivalent of such value usingprescribed criteria. These principles have remainedthe basis for customs valuation since then.

Brussels Definition of Value The first interna-tional standard based on the GATT valuation prin-ciples, the BDV, was introduced in 1950. The BDVis based on the concept of “normal price”—theprice that the goods would obtain under open mar-ket conditions between unrelated buyers and sellersunder specified conditions of time and place. Inpractice, as the bulk of imports are the subject of abona fide sale effected in conditions consistent withthe terms of the definition, the transaction orinvoice price can be taken as a valid basis for valua-tion for the majority of imports. The BDV recom-mends that the invoice price be used to the greatestextent possible. Where the invoice price cannot beused, such as with transactions that are not at arm’slength, with goods on consignment, with importa-tions by agents and concessionaries, or when thedeclared price is suspiciously low, customs can useanother suitable basis to construe the normal price,using available information and taking intoaccount the actual conditions relating to the trans-action being valued. This flexibility is severelyrestricted under the ACV.

BDV acceptance represented substantial progresstoward the international standardization of valua-tion systems. By 1970, about 100 countries appliedthe BDV (many on a de facto basis), and several eco-nomic associations had adopted it as their valuationstandard—the European Economic Community(EEC), Customs Union of Central African States(UDEAC), and Caribbean Common Market(CARICOM). However, a number of important

trading countries (the United States and NewZealand, among others) did not adopt the BDV andcontinued to apply their own systems, largely basedon the positive concept of value. Some othersadopted the BDV when it was extended to coverFOB countries (Australia, for example) whereasCanada continued to use a fair market value in theexport country, leading it to undertake investiga-tions in the country of export. Moreover, theBDV itself was not always applied uniformly,and exporters complained about discretionary andunjustified rejection of the invoice price and uplift-ing of the declared value by customs. In addition,many countries relied on reference prices for protec-tive purposes and for facilitating customs clearancewithout endangering budget revenues. Negotiationson customs valuation were therefore included in thenegotiations on nontariff barriers at the TokyoRound GATT negotiations (1973–1979).

The Tokyo Round and the Agreement onCustoms Valuation The purpose of the negotia-tions on customs valuation at the Tokyo Round wasto arrive at a fair, uniform, and neutral standard ofvalue that precludes the use of arbitrary or ficti-tious values, conforms to commercial realities, anddoes not act as a barrier to trade.2 Following diffi-cult negotiations between industrialized and devel-oping countries, agreement was reached on a newvaluation standard, the Agreement on Implementa-tion of Article VII of the GATT.3

Developing countries entered the negotiationsby fully supporting the EEC valuation draft pro-posals, mainly based on the BDV. But the EEC, fol-lowing separate understandings with the UnitedStates, dropped its support for the BDV and optedfor the positive concept of valuation. This conceptprovided that, with few exceptions, the valueshould be determined on the basis of the priceactually paid or payable for the imported goods.The exceptions were listed, as were the five alter-nate methods that were to be applied in stricthierarchical order when the primary method, thetransaction value, could not be applied.

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 157

2. The Tokyo Round objective was to achieve the expansion andever greater liberalization of world trade through the progressivedismantling of obstacles to trade.

3. Generally referred to as the GATT Valuation Code (GVC)until the Uruguay Round, and since then as the ACV.

Developing countries objected strongly to thenew proposal, particularly to its failure to providesufficient authority to customs to reject transactionprices that were substantially out of line with thoserelated to transactions in like goods when the differ-ence is not accounted for. They argued that the draftagreement would not enable them to take actionagainst underinvoicing, which was more prevalentin their countries than in developed ones. They alsoargued that adopting the ACV would increase therisk of fraud and would result in revenue losses.These objections were partly addressed by introduc-ing provisions for special and differential treatment(SDT). The most important provision allowed thecountries more time to fully implement the ACV.However, as membership in the GATT did notrequire member countries to implement the indi-vidual GATT codes, there was no obligation formembers to introduce the valuation code.

The Uruguay Round and the Decision on Shiftingthe Burden of Proof

The Uruguay Round negotiations led to the adop-tion of the “Decision regarding cases where customsadministrations have reasons to doubt the truth oraccuracy of the declared value” (Decision 6.1 basedon Article 17, see annex 8.A). That decision came tobe known as the SBP (shifting the burden of proof)and was appended to the ACV to clarify the intent ofthe original valuation provisions. The SBP deter-mines that in cases where customs has reasonabledoubts as to the truth or accuracy of the importer’sdeclaration, the burden of proof could be shifted tothe importer to prove that the declared value repre-sents the total amount actually paid or payable forthe goods. In this process customs discusses with theimporter their reasons for doubting the declaredvalue, allows the importer to respond, and informsthe importer of their final decision. The decisionmay be that customs still has reasonable doubts, thatis, it deems that the customs value of the goods can-not be determined on the basis of the transactionvalue, and thus proceeds to use the alternate valua-tion methods of the ACV, which must be followed instrict order.

State of Implementation

All industrialized countries apply the ACV. TheUruguay Round made its implementation manda-

tory for all World Trade Organization (WTO)members.4 Developing countries that had not yetadopted the ACV were given five years to introduceit, or until January 1, 2000, at the latest, under theSDT provisions of the ACV. For countries joiningthe WTO at a later date, the five-year period beginsfrom their date of accession to the WTO. The WTOCommittee on Customs Valuation may agree to anextension at a country’s request.

Since the conclusion of the Uruguay Round, 58developing countries have requested the five-yearimplementation delay.5 Of these, only two intro-duced the ACV before 2000. The delay periodexpired for 29 countries on January 1, 2000, and for25 more during 2000 and 2001. Twenty-two coun-tries had been either granted an extension to thefive-year delay or their request for extension wasunder consideration, and 13 countries imple-mented the ACV (with reservation as to the use ofminimum values).6 In addition, 23 countries,mostly among the poorer of the developing coun-tries, neither invoked the five-year delay, nor noti-fied the WTO about the passing of legislation. Itthus appears that many developing countries haveproblems with implementation of the ACV despitesubstantial TA received.

The Agreement on CustomsValuation: An Introduction

The ACV establishes that customs value should, tothe greatest extent possible, be based on transactionvalue, that is, the price actually paid or payable forthe goods being valued, subject to certain adjust-ments. Where the transaction value cannot be usedbecause there is no transaction value or theprice has been influenced by certain conditions or

158 Customs Modernization Handbook

4. Upon creation of the WTO (1994 Marrakesh Agreement), allWTO members were required to subscribe to all WTO Agree-ments, including the ACV.

5. From data obtained from various undated documents fromthe WTO Committee on Customs Valuation concerning the sta-tus of implementation of the ACV, including the extension situ-ation as of August 31, 2002.

6. Several developing countries also had reservations related tothe reversal of the order of Articles 5 and 6, the deductive andcomputed value methods (52 countries as of October 2001), andthe three-year delay for application of the computed valuemethod (46 countries as of October 2001).

restrictions, the ACV provides five alternate meth-ods, to be applied in prescribed order. In summary,the ACV evaluation methods are as follows:

• The transaction value (Article 1—PrimaryMethod). The price actually paid or payable forthe goods when sold for export to the country ofimportation, subject to adjustments for certaincosts and considerations in accordance withArticle 8 of the ACV. The possible adjustmentsinclude commissions, containers, packing,certain goods and services, royalties, and licensefees. Buying commissions are not to be in-cluded, and legitimate discounts to sole agentsand sole concessionaries are to be accepted.Article 1 also stipulates that if the buyer andseller are related in business, this does not initself constitute grounds for rejecting the trans-action value. Such value needs to be acceptedprovided that the relationship did not influencethe price.

• The transaction value of identical goods (Article2—First Alternate Method). The transactionvalue of identical goods sold for export to thesame country of importation at or about thesame time, under a sale at the same commerciallevel and in substantially the same quantity, asthe goods being valued.

• The transaction value of similar goods (Article3—Second Alternate Method). The transactionvalue of similar goods sold for export to thesame country of importation at or about thesame time and under the same conditions asthose for identical goods but with differentdefinitional standards.

• The deductive method (Article 5—Third AlternateMethod). Under this method, the customs valueis based on the unit price at which the importedgoods or identical or similar goods are sold inthe greatest aggregate quantity in an unrelatedparty transaction, subject to the deduction ofprofits and certain costs and expenses incurredafter importation.

• The computed value method (Article 6—FourthAlternate Method). The value consists of the sumof the costs of materials and manufacturing,profits, and general expenses equal to that usu-ally reflected in sales of goods of the same classby producers in the exporting country forexport to the importing country.

• The fallback method (Article 7—Fifth AlternateMethod). If the customs value of the importedgoods cannot be determined on the basis of any ofthe previous methods, it shall be determined using“reasonable means consistent with the principlesof the ACV.” This implies that the previous meth-ods should be applied in a flexible way. Article 7prohibits the determination of value on the basis of

(a) the selling price of goods produced in theimporting country

(b) a system based on acceptance of the higherof two alternative values

(c) the price of goods on the domestic marketof the exporting country

(d) the cost of production other than the com-puted value as determined in line with thecomputed value method

(e) the price of the goods for export to a coun-try other than the importing one

(f) minimum values(g) arbitrary or fictitious values.

The ACV includes provisions concerning the treat-ment of transport and insurance costs, currencyconversion, right of appeal, publication of laws andregulations concerning customs valuation, andprompt clearance procedures. It also stipulates thatupon written request the importer has the right to awritten explanation as to how the customs value wasdetermined. It states that nothing in the ACV shallbe construed as restricting the right of customsadministrations to satisfy themselves as to the truthor accuracy of any statement, document, or declara-tion presented for valuation purposes. Provision isalso made for administration, consultation, and dis-pute settlement, and for the establishment of twocommittees to oversee its implementation: theCommittee on Customs Valuation at the WTO, andthe Technical Committee on Customs Valuationunder the auspices of the WCO.

Special Provisions for Developing Countries

The ACV contains special provisions for developingcountries. These stipulate that under certain condi-tions developing countries may do the following:

• delay ACV application for a maximum of fiveyears and, under specified conditions, request anextension of that period

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 159

• delay application of the computed value methodfor a period of three years following their appli-cation of all other provisions

• using officially established minimum values,make a reservation to retain such values on alimited and transitional basis

• make a reservation to allow importers to reversethe order of application of the deductivemethod and the computed method of valuation,dependent on the approval of the customsadministration

• make a reservation to value imported goodssubject to processing after importation on thebasis of the deductive method, whether or notthe importer so requests.

An associated decision stipulates that developingcountries experiencing problems with importa-tions into their countries by sole agents and conces-sionaries may request a study of this question. TheACV also details the procedures that should befollowed in cases where customs administrationshave reasons to doubt the truth or accuracy of thedeclared value. The texts make it clear that theseprocedures should not prejudice the legitimateinterests of traders.

Implementation Requirements

Implementation of the ACV requires the establish-ment of a legislative and regulatory framework;a mechanism for judicial review; administrativeprocedures; organizational structure; and training.These requirements are summarized below andpresented in more detail in annex 8.B.

Legislation and Regulations ACV provisionsmust be incorporated into the national legisla-tion. While legislative practice in a countrymay dictate the actual form of including the provi-sions, the valuation legislation should be compre-hensive, covering the ACV and its InterpretativeNotes as well as a number of specific provisionssuch as those concerning exchange rate conver-sion, right of appeal, release of goods before finaldetermination of value, and treatment of trans-portation and insurance costs (FOB or CIFsystem).

Valuation Procedures and Control The valua-tion function should be fully integrated into cus-toms’ overall operational structure and practices.This implies the following:

• It is the importer’s responsibility to declare theimport value in accordance with the ACV.

• Value checks should be limited and selectiveat the time of clearance, and shipments shouldnot be retained because of value disputes, butcleared with reservation as to value and undersecurity for additional duties that may be atstake.

• Selective post-release verification and audit willbe applied with selection of goods or importerbased on information from the risk manage-ment system.

• Customs needs to maintain a comprehensiveinformation system and database. Informationand data are needed to help detect cases ofunderinvoicing or overinvoicing, to comparevalues for application of Article 2 (identicalgoods) and Article 3 (similar goods), to developand update the risk analysis and managementsystem, and to enable the central and regionaloffices to respond to queries from the clearanceoffices.

Organizational Structure and Training

The recommended organizational structure forvaluation requires the establishment of a centralvaluation office complemented with regional andlocal offices as needed in relation to country sizeand the overall customs department organization.The central valuation office is to be responsible forestablishing valuation policy, developing proce-dures, supervising correct and uniform implemen-tation by all offices, ensuring adequate training,and monitoring international developments in val-uation. It should develop a value database andcould be made responsible for the value-related riskmanagement system. The local and regional officeshave an operational role. The complexity of theACV and the control strategy (post-clearancereview and audit) require the services of valuationspecialists trained in value legislation and proce-dures and auditing of company accounts.

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ACV Implementation inDeveloping Countries

Many developing countries face serious difficultiesin implementing the ACV. The major ones arediscussed here.

Lack of Ownership

As noted, empirical evidence indicates that the con-cerns of developing countries regarding the valua-tion system to be adopted in the WTO were notfully taken into account, and were even largelyignored. For instance, commitments made by thecountries’ Ministers of Commerce, who representtheir countries at the WTO, were often poorly com-municated to the countries’ Ministers of Finance,who are responsible for implementing the ACV. Asa result, the ACV was poorly internalized. The SDTprovided some flexibility as to the timetable forACV introduction, but was widely perceived asinadequate in taking into account the special diffi-culties of developing countries. Furthermore, poorinternalization is also often reflected in inaccurateor incomplete incorporation of the ACV provisionsinto domestic legislation, resulting in the system nolonger being WTO-compliant. This is the case, forinstance, when the WTO requirement that theimporters have the right to launch a complaintthrough their trade representative to the WTO isomitted.

Revenue Loss

Developing countries are deeply concerned withrevenue loss. Low taxpayer compliance and admin-istrative inadequacies in customs make it difficultto effectively check underinvoicing. Underinvoic-ing becomes attractive to the importer because ofthe high level of taxes levied at the import stage.There is no empirical proof that supports this con-cern and knowledgeable observers point to coun-tries that have implemented the ACV withoutsuffering revenue losses. It is also difficult to deter-mine such losses under the ACV because countriesthat have officially subscribed to it adopt valuationpractices that deviate substantially from pure ACVones, precisely to protect revenues. This issue fre-quently reappears at ACV discussions, reflectingthe concerns of customs managers whose main

responsibility is revenue performance, and whosejob security is dependent on it. The heavy depend-ence on customs revenue (see annex 1.A) certainlyhas a bearing on their concerns that ACV imple-mentation might lead to potentially significant rev-enue losses.7

For technical reasons the value of the ACV islower than that of the BDV because it excludesbuying commissions (when undertaken by theimporter) and advertising from the dutiable value,and requires customs to accept legitimate discountsgiven to sole concessionaries, sole distributors, andsole agents.8

High Tariff Rates

While tariff rates have been lowered in manycountries within the context of multilateral andregional agreements, their average level remainssubstantially higher in developing countries thanin developed ones. Data for 2001 show that in theOrganisation for Economic Co-operation andDevelopment (OECD) countries, average importduties amounted to 1.1 percent of the import

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 161

7. In March 1990, a Preferential Trade Area (PTA) proposal forchanges to the ACV stated that ACV implementation wouldcause customs revenue to decline by nearly 10 percent unless theACV was amended along the lines proposed by the 17 PTAmember countries (WTO 1990). A 1996 informal study made bythe Indian customs administration estimated revenue losses ofRs. 100 billion (about US$2.8 billion) on account of undervalu-ation. This study was the basis for setting up a new Directorateof Valuation in India in 1997 (Source: personal communicationwith Indian Delegation at WTO). A 2002 report on valuationfraud in China mentions 12 cases in which a total of US$1.5 mil-lion was lost (Source: Indian Delegation at WTO). Representa-tives of PSI companies confirmed that in their experience fakeinvoicing and undervaluation of shipments to developing coun-tries occurs frequently.

8. A WCO study suggested that the adoption of the ACV byOrganisation for Economic Co-operation and Developmentcountries led to slightly lower customs value and customs dutiescompared with the BDV. (See Customs Cooperation Council1985.) Australia estimated the reduction in revenue to be equiv-alent to a general reduction in duty rates of 2 percentage points.The EEC reported shrinkage in the overall taxable base, but ofno particular significance to revenue. Finland estimated the lossof revenue to be less than 1 percent of all ad valorem duties andtaxes levied by customs. Spain projected losses of 4 percent inthe most sensitive commodity areas, but lower overall losses.Canada negotiated GATT tariff rate adjustments needed tomaintain tariff protection of certain industries at the prevailinglevels, but expected no significant revenue losses. New Zealandreported a loss of 0.25 percent of customs revenue.

value compared to 11.8 percent in non–OECDcountries. For developing countries, the averagecollected tariff fell in the range of 7 percent to17 percent. Even when the average tariff rate of agiven country is relatively low, tariff peaks createincentives to undervalue imports of these goods.To the extent that the avoidance of high dutyrates tends to contribute to tax evasion practices,underinvoicing becomes more attractive toimporters in developing countries than else-where.

Less Compliant Trading Environment

Often large shares of imports are accounted for byan informal sector that uses unreliable invoices, haspoor bookkeeping standards or maintains nobookkeeping at all, has no fixed business address, orhas frequent changes in the name of their busi-nesses. Under these circumstances, valuation con-trol based on post-release audit is hardly applicable.Customs officials in many countries are aware ofthe ease with which import invoices are falsified atthe point of export or even produced in the desti-nation country. Some of these falsified invoices areeasy to detect. Others display a high degree ofsophistication and are prepared by medium- andlarge-scale importers. Only a well-developed cus-toms organization has a chance of detecting suchfraud. Overreliance on invoices is often seen ascomplicating efforts to address the underinvoicingissue.

Administrative Limitations

The administrative capacity to effectively imple-ment the ACV system is lacking in many develop-ing countries. The enormous variety of goodstraded, widely differing prices for similar goods,continuously changing prices, as well as differentlevels of transaction and sale conditions complicatethe correct valuation of imports. Much of the infor-mation needed to value a transaction is not readilyavailable because it remains with the foreign sup-plier. For instance, cross-checking the outgoinginvoices of the seller (exporter) with the incominginvoices of the buyer (importer) or performingsimple checks such as determining the existence ofthe exporter is normally not possible or excessivelycumbersome. That valuation fraud needs to be

dealt with not as a valuation matter but as a fraudinvestigation activity also presents implementationproblems.

Applying the alternate methods of the ACV instrict order is burdensome, costly, and time consum-ing. It requires updated information on values ofidentical and similar goods, and information that isnot readily available or that requires complicatedcalculations. To apply the computed value wouldrequire investigations in exporting countries, a pro-cedure that is simply not feasible in most developingcountries because of lack of budgetary resourcesand staff. Strict application of these rules would leadto clearance delays, particularly in cases where post-clearance audits are not yet in place. As a result,many developing countries resort to the fallbackmethod for a substantial part of their imports.Clearly, this is far from an ideal situation for a valua-tion system that was supposed to facilitate trade.9

The main developing country limitations stemfrom the following:

• inadequate value data and poor means of infor-mation gathering and communication thatresult in customs having little or no access toprice information and little means to verifydeclared values

• heavy administrative constraints such as lack ofqualified personnel; poor or nonexistent trainingfacilities; and public service salaries, substantiallylower than those in the private sector, that oftendo not pay a living wage, or are insufficient toattract the best

• limited and often ill-managed computerizationwith only statistical functions, or nonautomatedclearance processes with too many manual func-tions and excessive room for discretion

• inadequate organization and poor managementresulting in unavailability of operating manuals,poor hierarchical supervision, and weak or non-existent internal audits, as well as inadequatemanagement information systems, and unavail-ability of basic equipment

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9. A 1999 World Bank publication had the following comments:“The prescribed Customs valuation system is inappropriate forthe problems the least developed countries face, incorrect as asolution to their Customs valuation problems, incomplete as asolution to their Customs system problems. It is also incompati-ble with the resources they have at their disposal.” (Finger andSchuler 1999, p. 24).

• complex SBP procedures—in case of reasonabledoubt about the declared value, customs has torequest further explanations and documentsfrom the importer in support of the declaredvalue, notify the importer in writing ifrequested, allow the importer to respond, andcommunicate its final decision in writing.

These differences have led to less than properimplementation in some of the countries that haveintroduced the ACV. Empirical evidence confirmsthat customs frequently does not comply with therequirement of informing importers on whatgrounds they dispute declared value, nor do theyprovide written justification for their claims. Inother cases customs somehow misleads importers,telling them that if they do not increase declaredvalues, the goods will not be released. This leads toconditional release and importers often have diffi-culties getting back their deposits. Altogether, thereis a situation where importers know that theirdeclared value will almost inevitably be chal-lenged, so they are encouraged to underdeclare;and customs considers that all imports are there-fore undervalued. This vicious circle should bebroken, but little effort has been made so far inthat direction. A frequent error made in manycountries is the idea that physical examination isessential to verify value. In fact, valuation oweslittle to examinations, except in a few obvious caseswhere the characteristics of the goods are notadequately or sufficiently described in the docu-mentation.10 This affects the risk-managementapproach to customs.

Doha Ministerial Conference

Developing country action for changing the ACVhas continued within the framework of the WTO.Proposals for amendments to the ACV to betteradapt it to the developing countries’ trading envi-ronment and administrative realities were submit-ted to the Ministerial Conference at Doha (Novem-ber 2001). The Doha Ministerial Conference issuedthe Decision on Implementation-Related Issues andConcerns that covers the exchange of information

on export value between exporting and importingcountries. (See annex 8.C.)11 Implementation ofthis decision together with the submitted pro-posal is being negotiated or further studied inthe appropriate WTO bodies.

Toward Better Customs ValuationPractices

There are a number of policies and approaches thatcould lead to better customs valuation practices indeveloping countries. These would also protect rev-enue, provide for increased transparency, and min-imize interference with trade flows. Some measureswould require consideration at WTO and WCOlevels, others would require TA, while the mostimportant ones would require actions by the con-cerned governments.

Addressing Ownership Questions

The lack of developing country ACV ownershiparising from the historic neglect of their concernscannot be fully overcome. However, there are waysto repair some of the damage. At the UruguayRound negotiations, developing countries pressedfor change with some results, including the SBP. Thisprocess should be continued. One way to do sowould be for the developing countries to clearly for-mulate their challenges in implementing the ACV atthe next WTO trade negotiations and to suggestpractical approaches for implementing the spirit ofthe ACV. This could be initiated by identifying pos-sibilities where customs authorities could assist eachother with data exchanges and modernization

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 163

10. For example, when a tariff heading corresponds to brands ofsignificantly different values.

11. Decision 8.3 “underlines the importance of strengtheningcooperation between the customs administrations of Membersin the prevention of customs fraud. In this regard, it is agreedthat, further to the 1994 Ministerial Decision Regarding CasesWhere Customs Administrations Have Reasons to Doubt theTruth or Accuracy of the Declared Value, when the customsadministration of an importing Member has reasonablegrounds to doubt the truth or accuracy of the declared value, itmay seek assistance from the customs administration of anexporting Member on the value of the good concerned. In suchcases, the exporting Member shall offer cooperation and assis-tance, consistent with its domestic laws and procedures, includ-ing furnishing information on the export value of the good con-cerned. Any information provided in this context shall betreated in accordance with Article 10 of the Customs ValuationAgreement.” WTO (2001, pp. 5–6).

initiatives. Acting on proposals formulated at theDoha Conference should complement this. It wouldbe essential for industrialized country WTO mem-bers to recognize that developing countries face realproblems in implementing ACV provisions.

Reforming the Tariff and Trade Regime

Incentives to underinvoice or otherwise evadeduties originate mainly from high tariff levels andtrade restrictions. Lower import taxes and a moreliberal import regime would alleviate the problemof underinvoicing and resulting revenue loss.Strengthening the indirect tax regime (value addedtax or VAT) could help make up for revenue lossarising from lower tariffs. VAT is also levied at theimport stage and runs the risk of undervaluation,but any revenue loss can usually be recapturedwhen these transactions are taxed at later stages ofthe production and distribution chain throughinland revenue or customs post-clearance audit.However, when these goods are not included infuture taxed transactions (informal trade, forexample), the sales tax proceeds are not recovered.

Modernizing Customs Administration

The key action needed in modernizing a customsadministration consists of designing and imple-menting a comprehensive customs modernizationprogram. Customs valuation does not operate in iso-lation from the overall customs operational andmanagement system. The ability to effectively under-take a valuation function is directly related to theadministration’s overall quality. A modernizationprogram should include the following key elements:

• streamlining and computerizing operationalprocedures

• introducing modern clearance strategies, that is,selective checking based on risk analysis andmanagement, and post-clearance review

• professionalizing customs through appropriatepersonnel recruitment, development, and man-agement policies; better salaries; adequate andsustained training; and internal controls

• introducing modern forms of organization andmanagement based on administrative, finan-cial, and technical autonomy, coupled withaccountability.

For a comprehensive modernization program alongthose lines to succeed, strong and sustained supportfrom senior levels of government is essential.Furthermore, such programs should ideally be TA-oriented and implemented with the assistance oforganizations experienced in undertaking customsadministration reform projects. Some governmentshave also elected to temporarily use PSI services orPSI-like services to assist with price informationgathering and also with the development of a data-base during the first years of the customs adminis-tration’s implementation program.

Strengthening the Organization and Infrastructurefor Valuation

Effective ACV implementation requires an effi-cient customs administration, and any initiative tomodernize customs should take this into account.When there are delays in undertaking comprehen-sive reform, the valuation function still can andshould be strengthened. Such a thrust requires thefollowing:

• provision of the necessary legislative framework,including in the area of foreign exchange conver-sion rates, treatment of transport and insurancecosts (CIF or FOB system), right of appeal, andso forth

• development of value declaration and checkingprocedures, including self-assessment, selectivechecking, risk analysis and management, post-clearance review, and audit

• setting up a central valuation office and regionalvaluation offices, including post-clearance reviewor audit unit(s)

• training of valuation officers in the ACV systemand in post-release review and audit procedures

• establishment of a value information system anddatabase.

Providing importers with an advance ruling on val-uation can also speed up the valuation procedure.Such a ruling can be obtained in advance whenthe importer submits transaction-related docu-mentation to customs. Once granted a ruling, theimporter notes the registration number of the rul-ing on his declaration at the importation stage, andno further valuation work needs to be undertaken,thus speeding up the clearance procedure.

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Establishing a Value Database

Effective ACV implementation also requires cus-toms to have information on prices to permit it toeliminate reasonable doubt on the accuracy ofdeclared values and to derive the import valueusing the alternate valuation methods provided inthe ACV. It is sometimes argued that when customsdeals with an almost fully compliant trading envi-ronment in which the few cases of fake invoicingcan be dealt with outside the valuation system(such as fraud cases) there would be no need for avaluation database. Yet quite a few developed coun-tries still feel the need to equip their services with avaluation database. For developing countries inwhich, for a substantial share of imports, theinvoice prices cannot be accepted out of hand as thetrue representation of the price actually paid orpayable for the goods, the development of a com-puterized database is a priority, without whichproper operation of the ACV system cannot beexpected. A valuation database used as a source ofinformation and guidance is compatible with ACVimplementation; and the possibility of undertakingthis on a regional basis should be explored.12

Indeed, a database would allow customs to makemore informed decisions and thus would enhanceits capability to properly implement the ACV. How-ever, experience has shown that these databasestend to evolve into minimum price lists, which isobviously contrary to the ACV.

The WCO is now preparing a document thatwill provide guidelines for the development anduse of a national valuation database as a risk assess-ment tool. Some observers suggest that such a data-base could focus on the 100 most importantimported items, and thus would cover the largestshare of total imports. The creation of such a data-base should be within the means of nearly all devel-oping countries. Possible sources for building up adatabase include the following:

• Reliable, scrutinized, recent import declarations.This is the primary source for building a data-base and should be supplemented with datafrom price lists, catalogues, trade publications,

market research, and various other sources.Good examples of such databases are the onesthat the Peruvian and Pakistani customs author-ities have on the Internet.

• Certificates of verification from the PSI serviceproviders. This could be a good reference for thePSI-user countries. Countries using PSI servicesmay want to build support for the creation of avaluation database into their PSI contract.

• International databanks, already existing or beingdeveloped, in particular by information technol-ogy companies that specialize in establishing datawarehouses on world prices. Diligent use of Inter-net sites can provide valuable data that couldprovide useful valuation-related information.13

Customs can even make available to the import-ing community the references to the sites theyconsult, as in Pakistan. Developed countries thatoperate databanks for valuation purposes couldassist developing ones by providing informationfrom their databases.

• Increased use of electronic data interchange sug-gests that there exists technology to obtain valua-tion information.14 Use of this procedure wouldprovide internationally recognized and standardproduct descriptions. It is tied to prices at agiven stage in the distribution cycle. Thisapproach could also detect counterfeit products(using the barcode of the original product butmade by unlicensed producers, and thuscheaper) that could rightfully be valued at theprice of the original product. Uganda has initi-ated some research on this topic. This approach,based on the use of bar codes and electronicchips that use radio frequency identification(RFID) technology to keep track of items andautomatically discriminate between varioustypes of information through a wirelessexchange of data between the built-in memoryand the Reader (also called IC tags), deserves

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 165

12. These issues were discussed at a symposium held at theWCO in April 2003; the report is on the WCO Web site www.wcoomd.org.

13. Customs in Pakistan makes available to the public a list of“Price Related Links” that give Web sites that customs consultsto obtain information on import values. See www.cbr.gov.pk/newcu/portals.htm. The same Web site provides weekly updateson Assessed Values Evidences by detailed Harmonized Systemclassification. Another source for price data is www.pricesaroundasia.com where subscribers can obtain pricesearches. Obviously these sources must be used cautiously.

14. The WCO Customs Data Model that defines a customsdata set for electronic transmission includes information onvaluation.

further experimentation and the lessons learnedwould need to be disseminated.

Exchanging Information with Exporting Countries’Customs Administrations

At the Doha Ministerial Conference a proposal wassubmitted for a multilateral solution within theframework of the ACV that would enable customsadministrations of importing countries to seek andobtain information on export values contained inexporters’ declarations, in doubtful cases.15 A previ-ous attempt to commit WCO members to assistingeach other in the areas of prevention, investigation,and repression16 has not been successful to date asonly 28 members ratified the provisions relating tovaluation fraud. Most of industrialized countrieshave not done so. The Doha proposal intended tomatch the ACV obligation with a binding obliga-tion on member countries to render assistance toverify customs value in doubtful cases.

The Doha Ministerial Conference agreed thatcustoms administrations may seek assistance fromthe customs administrations of an exporting mem-ber on the value of the goods concerned, and thatthe exporting member shall offer cooperation andassistance, consistent with domestic laws and pro-cedures, including furnishing information on theexport value of the goods concerned. As a result ofthese discussions, the WTO Committee on Cus-toms Valuation and the WCO Technical Committeeon Customs Valuation were mandated to identifyand assess practical measures to address the con-cerns expressed by several developing countriesregarding the accuracy of the declared value,including the exchange of information and guide-lines for the use of a valuation database.17

It is clear from discussions at the WTO Commit-tee on Customs Valuation as well as from debates atthe WCO Policy Commission that there are majordifficulties with implementing the exchange of valu-ation information. In December 2002, the WCOPolicy Committee Meeting examined how assistancein valuation exchange could be used as a short-term

strategy to supplement a customs modernizationeffort. Representatives of developing countries’ cus-toms administrations strongly endorsed the mutualassistance approach for valuation issues. However,customs representatives from industrialized coun-tries were not supportive of this approach outside ofcriminal investigations or where important nationalrevenue implications were involved. They assertedthat they are not allowed to provide such data, thatthe burden of doing so would be excessive, and thatthe value of the data they could provide would be ofno great assistance anyway.

A number of industrial countries noted that theirdomestic legislation (confidentiality laws, secrecylaws) prevents their customs authorities from rou-tinely providing such information or that the legis-lation contains outright prohibitions for such infor-mation to be provided outside of criminal cases.This information is usually under the purview ofother agencies that often refuse to share it.

They also noted their concern that an avalancheof requests would place an undue burden oncustoms to provide the information to the import-ing country. Some customs administrations maynot have the necessary resources to meet suchdemands. To counter such fears the WCO prepared,in 2002, a Draft Guide to the Exchange of CustomsValuation Information to seek a way forward on theproblems identified with the exchange of valuationinformation. The guide provides a checklist forvaluation verification actions to be taken by animporting customs administration before request-ing information from the exporting one. The stepsare demanding and would ensure that suchrequests would neither be frivolous nor substitutefor diligent customs work in the country requestingsuch information. The guide was adopted by theTechnical Committee on Customs Valuation inearly 2003. The guide was also submitted to theWTO Committee on Customs Valuation as a prac-tical measure to address the valuation concerns ofdeveloping countries.

The value data at the disposal of the exportingcountry are also not reliable and not subject to thesame level of scrutiny as in the importing country.Some countries keep export value information onlyfor statistical purposes and not on the transaction-by-transaction basis required for the purpose of themutual assistance request that would allow cross-matching the data. Also, the information would not

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15. The proposal was submitted by India and supported by sev-eral developing countries.

16. WCO 1977.

17. Ministerial Conference, Fourth Session, November 14, 2001:Decisions on Implementation-related Issues and Concerns, andMinisterial Declaration. See WTO 2002.

be helpful in cases of collusion between importerand exporter. The fact that the declared exportvalue does not match the declared import valuewould not necessarily suggest fraud unless theexporting country authorities verify the informa-tion. Representatives of industrial countries arguethat this would result in shifting the burden ofinvestigation to the exporting country, somethingthey cannot agree with. To counter their position,some have argued that the fiscal authorities care-fully verify most exporter values when VAT creditsand refunds are involved. Better coordinationbetween customs and VAT refund authorities couldlead to more reliable data.

In conclusion and for the reasons mentionedabove, most industrial countries stated thatthey would comply with requests for mutualassistance with respect to valuation issues on acase-by-case basis, mainly in the context of bilateralassistance agreements. Prospects for establishing aworkable multilateral system of exchange of infor-mation on declared export values that could beused for ACV-based customs valuation in import-ing countries therefore do not look very promisingin the immediate future.18 More promising are theagreements made between members that operateunder customs unions or economic unions. Theseagreements could build on established mutual trustand procedures, and could be inspired by the WCOModel Bilateral Agreement on Mutual Assistance.The assistance received by the Botswana Depart-ment of Customs and Excise in valuation mattersfrom its neighbors is such an example.

Minimum Values and Reference Prices

Many developing countries use minimum values tocope with import valuation problems in cases offraud-sensitive goods and border traffic regulation.In those cases, invoices are either not available orreliable, and post-clearance verification is impracti-cal. Some countries also use such procedures to cir-cumvent collusion between customs officers and

importers, while other countries use this mecha-nism to protect national production.

ACV provisions allow the use of minimum val-ues on a limited and temporary basis. Would thetrading world be better off if greater latitude wasallowed for a wider use of administered minimumvalues or reference price systems, rather than imple-mentation of a transaction-based value system,which it cannot do properly? Some observers replypositively—certainly for standardized imports (rawmaterial, vehicles, and so forth) that rely on worldprices that are readily available or on widely usedprice lists (used cars, for example). The option ofmaking such lists available to the trading commu-nity could be considered, but this would requirehigh levels of transparency in establishing these listsas there is the danger that traders will try to influ-ence the lists for protective purposes. Such listswould have to be periodically reviewed with fulldisclosure of how the data were collected. Aninteragency group could be involved in the prepara-tion of the lists, and an independent contract groupcould be charged with its maintenance. (See Fingerand Schuler 1999.) This initiative merits further dis-cussion in international forums.

Technical Assistance

Substantial TA has been provided to preparedeveloping countries for the introduction of theACV, especially by the WTO and WCO. During1998–2001, the WTO held a total of 47 missions indeveloping countries for this purpose. From 1996to 2001 the WCO conducted 50 valuation missionsin developing countries. These missions have beenhelpful in providing customs officers and seniormanagers with a good understanding of the ACVsystem and its implementation requirements. How-ever, while a good understanding is a necessarycondition for ACV implementation, customs valu-ation work is only as good as the overall quality ofthe customs administration. As such, training cus-toms officers in ACV provisions will have limitedresults if customs is not fully computerized, if ade-quate valuation data are not available, if laws andregulations remain complex and uncoordinated, ifdiscretionary decisionmaking by officers remainsthe rule and not the exception, and if problems ofintegrity persist. Unless an enabling environment iscreated in which valuation training can be put togood use, much of the TA effort will be lost.

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 167

18. The WCO Council adopted a new International Conventionon Mutual Administrative Assistance in Customs Matters inJune 2003. It includes the provision that stipulates assistance inproviding information for the assessment of import or exportduties and taxes. As this convention is yet to be ratified, it wouldbe premature to see how it could actually address the concernsof the developing countries.

Much could be gained if institutions that pro-vide TA were to better coordinate their efforts. Butthere is no escaping the fact that it is the responsi-bility of the TA beneficiary countries to orient TAtoward overall modernization of customs servicesas a precondition for effective ACV implementa-tion. Political commitment to this endeavor isabsolutely necessary and will require donors to beinvolved in the modernization process. In themeantime, TA should focus on the development ofvalue databases, specialist training, risk analysis andmanagement, valuation-specific training, and post-clearance review and audit.

Preshipment Inspection Companiesand Other Related ServicesPrograms

Preshipment inspection (PSI) companies have beenproviding services in the customs area since themid-1970s. These services were initially performedfor central banks, to help them address the issue ofcapital flight resulting from overinvoicing ofimports. With increased liberalization of capitalflows, the focus of PSI services has gradually shiftedtoward revenue issues. Currently the main objec-tives of PSI programs in the customs area are tocontrol overinvoicing and underinvoicing ofimports; to provide governments with accurateinformation on importers’ import transactions andtax liabilities; and, in some cases, to control misap-propriation of donor funds provided for importsupport.

At present, some 40 countries, many of themamong the least developed countries, use PSI serv-ices (annex 8.D and table 8.D.1). The InternationalFederation of Inspection Agencies (IFIA), a world-wide association of inspection companies, pro-motes internationally accepted standards andmethods, and provides documentation and qualifi-cations of companies and personnel. The WTOAgreement on Preshipment Inspection, negotiatedunder the Uruguay Round, recognizes the need ofdeveloping countries to have recourse to PSI for aslong as necessary to verify quality, quantity, or priceof imported goods. Mindful that such a programmust be carried out without giving rise to unneces-sary delays or unequal treatment, the agreementestablishes rights and obligations of both user

members and exporter members to ensure that theprinciples and obligations of GATT 1994 apply tothe activities of PSI entities. It also provides for thespeedy, effective, and equitable resolution of dis-putes between exporters and PSI entities that ariseunder the agreement.19

Box 8.1 describes Peru’s use of a PSI companyfor its import verification program.

PSI intervention for customs purposes has beena controversial issue. Proponents argue that PSIintervention deters fraud in international transac-tions and reduces opportunities for malpracticeand corruption in customs administrations. Intheir view, the cost is justified because of the posi-tive impact on revenue collection and the reduceddistortions in trade transactions. Critics contendthat

• inspection of shipments at export is a burden onexporters and importers, creating delays andadditional costs

• there is no guarantee that goods imported arethe same as goods inspected, as changes canoccur following inspection because of practicalproblems related to complete sealing of allinspected shipments

• the requirement for exporters to entrust sensi-tive information about their transactions to PSIcompanies is an intrusion into commercial con-fidentiality

• the scarce foreign exchange spent on PSI couldbe better used to finance customs reforms. Gov-ernments should compare the costs of hiring aPSI company to how customs could improve itsoperations if given this amount of additionalresources

• inspection results are erratic and untrustworthy.

Still other critics argue that PSI agents abroad are nomore above integrity problems than local customsofficers and that PSI companies often use undueinfluence and financial incentives to obtain

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19. This concerns matters in carrying out PSI, inspection stan-dards, transparency in procedures, protection of confidentialityin business information, maximum times for carrying out PSIoperations, price verification, methodology, and appeals proce-dure. The agreement also stipulates obligations for exportingcountries relating to nondiscrimination, publicity of laws andregulations, and provision of TA to user members.

contracts.20 Hiring PSI companies is often charac-terized as counterproductive to customs reform, ifPSI services are used to substitute for efforts toimprove customs services.21 Based on these argu-ments and experiences, many knowledgeableobservers point out that under certain circum-

stances, including the cases where government serv-ices have been devastated by conflicts and noexpertise is available, the use of PSI services for ashort time is an advantage for some developingcountries.

Traditional PSI Programs

Under traditional PSI programs, the companyinspects the goods in the exporting country beforethey are shipped to the importing country; checkstheir quality, quantity, price, and tariff classification;and, in some programs,computes the duties and taxesdue. The company issues a verification report, whichis provided to the importer and included in the

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 169

BOX 8.1 Peru: Import Verification Program

In the context of Peru’s 1990 customs reform, anImport Verification Program (IVP) was initiatedthat required importers to obtain a certificate ofinspection issued by an authorized PSI companybefore the goods were to be shipped from thecountry of exportation. This measure was aimedat assisting customs in the verification of importshipments for purposes of duty assessment andcollection. Even though the Peruvian Customs hasstrengthened its valuation capacity, the PSI con-tract has been annually renewed. (See Goorman2004.) Customs considers this arrangement to besatisfactory despite periodic challenges.

Core Provisions. The IVP required that the PSIcompany certify the nature, quality, and value ofthe goods in accordance with national legisla-tion and physically seal the cargo container afterinspection. Originally customs was required toassess duties using the data specified in theinspection certificate; but since accepting theobligation of the ACV in 2000, customs has usedthe PSI information as an indicator of risk andimporters are no longer required to use the PSIvalue in their declaration. Customs can use thisindication in conjunction with its risk manage-ment system or valuation database for furtherinvestigation or post-clearance control. Beforereleasing the goods, customs verifies that thenature and the quality of the goods correspondto what is declared in the inspection certificateand that the tariff classification is correct. Ifthere is a discrepancy between the data in theinspection certificate and the findings of the ver-ification, customs permits release of the goodsand submits the case, duly substantiated, to theNational Valuation Department within 48 hours.The discrepancy will be decided by the National

Valuation Department and can be appealed tothe Customs Court, and then to the Fiscal Tri-bunal (entirely independent of customs), whichwill decide the final outcome.

The services of four PSI companies were ini-tially retained (in 1996 one was dropped). Theywere required to present a training program tocustoms personnel and to assist in the creationof the value database, as well as to provide cus-toms with monthly statistics to permit the moni-toring, control, and evaluation of the company’sactivities and performance.

Inspection Fees, Importers Choice, and ImportsExempted from the Program. Since 1999 in Peru,the inspection fee for all goods has been 0.5 per-cent of the value of inspected shipments, with aminimum US$ 250 per inspection. The fees arepaid by the importer directly to the PSI compa-nies. Importers are free to choose any of theapproved companies to inspect their importtransactions. Customs must inform importers oftheir obligations to adhere to the provisions ofthe IVP. Exemptions from the program includeimports with a value of less than US$5,000(a recent measure requires inspection for goodssensitive to fraud when the value exceedsUS$2,000), goods imported under the tempo-rary admission regime, donations under certainconditions, embassy imports, and postal ship-ments without commercial value. About 80 per-cent to 85 percent of imports are subject toinspection. According to data from the PSI com-panies, in only 0.17 percent of the total importinspections undertaken did customs state irregu-larities in quantity, quality, or value.

Source: Goorman 2004.

20. A notorious case was the PSI contract granted by Pakistan inthe early 1990s that led to a management overhaul of the PSIcompany involved.

21. See Low (1995). Low explains what PSI is, how it works, howit can benefit user countries, its drawbacks and pitfalls, andunder what conditions it can benefit user countries. The papercontains various case studies and recommendations regardingthe design, implementation, and monitoring of PSI programs.

customs declaration at import. The importer can relyon the report or decline to do so in the process ofcustoms valuation and calculation of duty payment.Use of PSI certificates varies greatly among countries.When determining the final customs value, wherejustified, customs can also disregard the PSI report onprice.

PSI programs typically cover all imports exceptfor low value shipments (the threshold is US$5,000,but may be as low as US$2,000), and some othercategories such as duty-exempted goods, importsfor defense, diplomatic supplies, and personaleffects. PSI arrangements often contain provisionsfor customs officers’ training and for assistance inthe construction of a valuation database. The PSIcost depends on the range of services being pro-vided and might be borne by governments orimporters. It falls in the range of 0.6 percent to1 percent of the value of the inspected shipments,and is usually borne by importers.

Under the BDV-based valuation system, PSIprice verification was aimed at verifying that theinvoice price corresponded to an open market pricein line with the valuation norm. Customs at thattime often used the prices recommended by the PSIcompanies to determine the customs value. Underthe ACV, customs cannot automatically determinedutiable value on the basis of prices recommendedby a PSI company. PSI price verification concen-trates on comparing the invoiced price with theprice of identical or similar goods being offered forexport from the same country of exportation at orabout the same time. When such prices are notavailable, PSI companies draw on informationfrom prices charged to different export markets(third-country export prices). However, as all WCOcountries are committed to implementing the ACV,which prohibits the use of third-country exportprices for customs valuation, such PSI informationcan only be used as test values or advisory opinionsin checking the truth or accuracy of the importer’sdeclared value.22 When the PSI-verified price

differs from the importer declared price, it mayprovide customs with “reasons to doubt the accu-racy of the declared value.” This may be used as arisk indicator to question the applicability of thetransaction value method of valuation and, follow-ing the procedures spelled out in the ACV, in deal-ing with cases of underinvoicing. Price informationfrom the PSI company, moreover, can be used as areference to complement import histories forestablishing and updating the country’s valuationdatabase. The whole process provides customs withinformation that normally would not be readilyavailable to their countries as long as they do nothave a well-established valuation practice. The useof PSI services in Peru is reviewed in box 4.1.

Evaluation of Effectiveness of TraditionalPSI Services

Most PSI services were introduced to assist customsorganizations in improving revenue collection andstreamlining the processing of foreign trade opera-tions (Anson, Cadot, and Olarreaga 2003).23 Thissupport would provide the time needed for agovernment to strengthen its customs administra-tion. However, PSI services have largely been usedwithout measurable improvements in customsadministration. This has frequently resulted inautomatic renewal of PSI contracts. This shouldnot be seen as a failure of the PSI program itself,which had a limited and mainly short-term objec-tive that did not include building customs capacity.It should be seen, however, as a failure of thegovernment to implement the necessary reform totake over the valuation function with confidence.The usefulness, efficiency, and effectiveness of PSIservices need to be judged against results in revenuecollection, trade facilitation, and their collateralimpact on customs administration. However,the evaluation of PSI programs remains unclear.

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22. When the WTO PSI Agreement was negotiated, all PSI usercountries were using the BDV system, which does not precludeuse of third-country export prices in determining customsvalue. To accommodate this situation, negotiators added a foot-note to the PSI Agreement, clarifying that PSI-using countriesare to be bound by the obligations imposed by the ACV whenusing opinions or prices given by PSI companies for determin-ing customs value. See Rege 2002.

23. The paper proposes a new econometric approach to evaluatethe impact of PSI services on revenue collection and fraud. Itshows that theoretically PSI intervention has an ambivalenteffect on customs fraud, and that for the cases reviewed the find-ings were not consistent. Yang (2003) presents evidence that ifPSI is introduced as an isolated initiative, smugglers will findways to reduce their duty burden, either by splitting up ship-ments to stay below the threshold set for PSI inspection orimporting through export processing zones, where leakage con-trols may be loose.

Obviously, the costs at which these results areachieved are not immaterial to the analysis.

Revenue Impact The revenue impact of PSIinterventions is difficult to measure because theintroduction of PSI often coincided with the lower-ing of trade taxes and other aspects of trade liberal-ization. Separating the effects on revenues fromeach of these factors is nearly impossible, eventhough PSI companies provide detailed statisticsindicating the impact that could have resulted fromacting on the information provided. Also, the pos-sible deterrent effect of the existence of PSI is notmeasurable, but could be substantial. The impactson fiscal revenues as a result of PSI programs havebeen mixed, and in many countries disappointing.One reason could be the fact that PSI informationhas at times not been systematically used in theprocess of determining import values. Customsofficers have also expressed doubts about the infor-mational value of some PSI data. In many countriesthere is a lack of serious monitoring and follow-upof information provided by PSI companies, and noafter-the-fact reconciliation is undertaken.

Trade Facilitation It is not clear how far PSI serv-ices facilitate trade in terms of reduced clearancetimes and more streamlined customs processing ofimport shipments. Much of the evidence in thisrespect is anecdotal. There have been claims ofdelays caused in the country of exportation, dupli-cation of controls, and errors caused by the PSIcompanies; but there have also been reports ofspeedier clearances and less hassles with corruptcustoms officers.

Detailed measurements on PSI trade facilitationhave only been made in a few cases. A World Bankpaper reported that the PSI program introduced inIndonesia in 1985 led to a significant reduction inthe clearance time for containers. After the begin-ning of the program, the percentage of containersthat cleared customs in less than four days rose from13 percent to 63 percent. Similar results wereobtained under the Philippines PSI program. Inboth Indonesia and the Philippines, the PSI pro-gram was only part of a wider trade facilitation pro-gram. Some of the program’s success was due to thesealing of full container loads by PSI companies atthe point of embarkation and the requirement thatcustoms let these shipments proceed to their final

destination without inspection, except in arestricted number of cases.

Impact on Customs Administration The use ofPSI services can demoralize customs personnel,and cause them to not cooperate with PSI compa-nies. This may be related to the fact that most PSIcontracts are entered into by the Ministry ofFinance without the full support of customs. PSImay also negatively affect customs modernizationefforts as work undertaken by PSI companiesreduces the pressure to reform and to gain theneeded experience in valuation. This may alsoresult in some customs administrations tending toneglect valuation work. Although training pro-vided by these companies under some arrange-ments has been helpful, it is not a substitute forthe hands-on experience and responsibility that theofficers would develop in valuation work in theabsence of PSI companies. Experience has shownthat PSI companies are usually not good at trainingand at the transfer of technology.

Impact on Traders’ Behavior There is no clearindication so far that the repeated increases ofimport values brought about by customs’ relyingon PSI interventions has significantly changed theproclivity of some importers to try to underinvoicetheir imports. While some importers appear tolearn by doing and less frequently undervalue theirimports, the practice in some countries of notpenalizing traders for it, does not give importers anincentive to declare the full transaction value oftheir imports.

Conditions to be Examined When ConsideringRecourse to PSI Services Experience in somecountries shows that reliance on PSI services couldbe useful, if carefully integrated in a customs mod-ernization program, or if the inability of customs toassume the valuation function is compensated for.PSI can play a role in ensuring proper duty assess-ment and collection during the first years of cus-toms reform while capacity is being built. Based onbroad experience with PSI services, the followingcapture some conditions to be examined whenconsidering recourse to PSI services or when evalu-ating such programs:

• Contract only with PSI companies that have agood reputation. IFIA provides a Code of Con-duct for the PSI companies.

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 171

• Select PSI service providers, and renew theircontracts, through transparent competitive bid-ding procedures.24

• Contract with a single PSI company for a periodof only a few years and, if it is so decided, renewthe contract under competitive conditions.Avoid split contracts, because multiple compa-nies are more complex to supervise, contractingcosts tend to be more expensive, and the indi-vidual companies are less carefully supervised bytheir respective headquarters for whom theyrepresent smaller profit opportunities. Also, splitcontracts may cause importers to adjust theirimport pattern so as to benefit from the mosthelpful inspection services providers. Better tokeep to a single contractor for a fixed timeperiod and adhere to competitive bidding forthe renewal of the contract.

• Have PSI contracts be fully endorsed by cus-toms, not imposed on customs by the Ministryof Finance or the central bank.

• Link the PSI contracts with a customs modern-ization project that clearly delineates the respec-tive responsibilities of customs and the PSIcompany.

• Make the PSI contract explicit: services to be ren-dered (price, classification, duties paid, specialimport regimes); time limit without automaticextensions; list of goods to be inspected withexceptions detailed; assistance to customs in set-ting up a valuation database; clear performancecriteria to allow the government to verify PSIperformance, with penalties for failing to adhereto the criteria; commitments to train customsstaff and to transfer technology; required reports

including the number of inspections, irregulari-ties addressed, adjustments to value made, andresulting additional assessments; and complaintsreceived.

• Record the PSI inspection reports in the cus-toms declaration and record them in the auto-mated customs management system. Reconcilethe findings of PSI inspection reports with cus-toms declarations and values retained for thecalculation of duties and taxes. This processshould explain the reasons for deviationsdetected.

• Apply the penalties provided in the law foroffenses of undervaluation so as to enhanceimporters’ compliance.

• Specify an arbitration or appeals procedure toprovide importers with an avenue to contest PSIassessments.

• Create a steering committee (located outsidecustoms, but with customs participation) tooversee PSI activities. Periodic reports should bemade available to civil society.

• Possibly articulate an exit strategy to ensure asmooth transition of the functions that were per-formed by the PSI service to customs. Followingexit, PSI companies could be retained to assist indealing with fraud-sensitive goods, or in othercases where valuation poses particular problems.

• Introduce a publicity campaign to informtraders and the public about PSI systems.

New Trends in the Provision of CustomsValuation Services

Along with the migration of many developingcountries from the BDV system to the ACV system,the private sector that used to offer PSI servicesstarted seeking ways to move away from the tradi-tional PSI schemes. The new direction includesmore selective programs that rely on selectivechecking, risk analysis, and post-clearance audits.To what extent these new services will be successfulremains to be seen. The trend is for private sectorservice providers to focus on the following issues:

• Development of risk assessment tools to assistcustoms in implementing a selective approach toverification so as to focus on the riskier foreigntrade transactions, a key element to faster clear-ance of goods. (See annex 1.D for a description.)

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24. Bidding documents should detail services to be procured,request price proposals, instruct the bidder to spell out its priorqualifying experience to undertake the task, and specify the exitstrategy. The evaluation criteria and weights to be assignedshould be made available beforehand to bidders. An evaluationcommittee should be established with representatives from con-cerned government agencies and with private sector representa-tives involved in trade. Its composition should be made publicprior to issuing the bidding documents. Companies should beprohibited from contacting individual committee membersfrom the time of publication of the tender to announcement ofthe results. The committee should communicate the results ofthe technical and financial evaluation to all bidders, and itshould be published in the local press. If the tender documentcalls for the committee to submit a recommendation to a higherauthority, the recommendation should be made public beforethe final decision.

• Specification that the services provided willdecline over time and that the company willassist customs to take over at an agreed on pace.The recent PSI contract in Madagascar specifiessuch provisions and will constitute a test for thisnew approach (see box 8.2).

• Valuation verification service and developmentof valuation databases. The purpose is to pro-vide customs with information that will allow itto challenge import values and to further carryout valuation in full compliance with ACV rules.The building and updating of a database onimport values are an important part of thisprocess. Such information is essential to apply-ing alternate methods of valuation when reason-able doubt is being raised with regard to thetransaction value of the goods being imported.

• Support for post-clearance audits where the PSIcompany, upon the request of the customsdepartment, provides intelligence informationregarding shipments selected for audit after the

goods have cleared customs. Mexico initiatedsuch a service in 2003.

• Assistance to customs in support services,including information technology.

There has been limited experience with these moreselective programs, so the jury is still out. They arelikely to be less expensive than traditional PSI serv-ices because they are more limited in scope andfocus better on risky imports. To adhere to thecontract terms, these programs will require theeffective transfer of skills and technology. Theirsuccess will also depend on capacity building incustoms, particularly in the areas of gatheringprice information and creating valuation data-bases, the implementation of the ACV, implement-ing selectivity in applying the control mechanismsavailable, and developing post-clearance auditcapacity. Close monitoring of these new servicesis needed to evaluate their effect on customsmodernization.

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 173

BOX 8.2 PSI Contract in Madagascar Introduces Targeted and EvolvingVerification Services

In early 2003 the Republic of Madagascarentered into a four year PSI contract with SociétéGénérale de Surveillance (SGS). This contractprovides for a gradual transfer of capacity tomanage the inspection, valuation, and classifica-tion functions to the customs authorities. Thistransfer is made possible through the extensiveuse of risk management techniques and tools.

Inspection. During the first six months of theprogram, SGS will inspect 100 percent of goods(with a value exceeding US$3,000) destined toMadagascar, prior to their shipment. This shareis to be reduced to an average of 45 percentduring the second year and to 10 percent in thethird and final year of the contract. This reduc-tion process will be monitored closely by cus-toms and SGS to ensure that the program’seffectiveness remains unaffected. SGS will assistthe authorities in setting up a “second inspec-tion” program of a small percentage of ship-ments at arrival to maximize the results ofinspections conducted by customs, an inspec-tion that will be transferred over time to a spe-cial audit unit of the Ministry of Finance.

Valuation. During the first two years of thecontract all transactions above US$3,000 will besubjected to this validation process. During yearthree, the share of transactions validated will be

reduced to 65 per cent to 70 percent and thento 30 percent in year four with transaction val-ues identified by customs to be validated bySGS. SGS will provide a valuation reference sys-tem to guide customs’ own valuation assess-ment. Customs staffs will be trained in post-clearance controls.

Tariff Classification. From 100 percent ofimports over US$3,000 in the first year, the shareof transactions subjected to customs classifica-tion inspection will rapidly decrease in years twoand three, to eventually reach 40 percent. Dur-ing the last year of the contract tariff classificationwill be wholly the responsibility of customs.

The program includes immediate implemen-tation of a risk management system, extensivetraining, and close cooperation between the PSIcompany and the authorities. To maximize theeffectiveness of the program and to ensure sys-tematic feedback of information, the authoritieswill reconcile the SGS information with that usedin their assessments prior to final clearance ofgoods. This should minimize the risk of the PSIoption not being used.

Source: Communication from the CustomsDepartment of Madagascar.

International Value Databases

In recent years a number of information technologycompanies have specialized in developing datawarehouses on world prices and systems to labeland track internationally traded goods. The pro-grams could provide price information to buyersand sellers worldwide via online access to databases.Prices are obtained and updated through an inter-national network of representatives and agents. Thesuppliers can update the specifications and prices oftheir products online. The data provided could beused in a manner consistent with WTO valuationrules. The cost at which information could be madeavailable to customs is not clear.

Another initiative, based on barcodes designedfor tracking goods in international trade, providesan attractive option. While not specifically designedfor customs valuation purposes, this approachcould provide customs officials with valuable priceinformation if price information was added to thetypical product-specific data. This approach wastested in one country and provided customs withrelevant price information for 80 percent of con-sumer goods. Experiments are continuing, basedon data provided by a retail sales outfit from aneighboring country. Further testing and researchare needed to find out how readily available thesedatabases are, and at what cost; assess how thismethod can assist customs officers in reaching con-clusions regarding the existence or not of the “rea-sonable doubt” required by the ACV to reject theprice; and determine how this would compare withthe newer PSI services. As noted, the use of IC tagsin this respect could also be explored.

Operational Conclusions

Developing countries originally objected to intro-ducing the ACV because it complicates efforts toaddress underinvoicing issues in a commercialenvironment that is very different from the com-mercial environment existing in industrializedcountries. Developing countries face the problemof the informal sector and the lack of complianceeven with larger known traders. At the UruguayRound, a decision was appended to the ACV thatprovides for shifting the burden of proof to theimporter when serious doubts exist regarding theaccuracy of the declared value. While this decision

provides developing countries with a tool to dealwith underinvoicing, the procedure is complicatedand leaves the ACV ill-adapted to the countries’needs. The countries lack ownership of the ACVsystem. Moreover, implementation of the ACVrequires price information that they do not haveand that is costly to obtain. Finally, a transactionvalue system can only be introduced effectively ina well-organized and trained administration thatis largely computerized and where informationflows are smooth and adequate. This is not the casewith many developing countries and causes con-cerns about possible revenue loss in implementingthe ACV.

There are a number of measures that could con-tribute to proper implementation of the ACV:

• Governments should realize that piecemeal TAfor customs valuation without comprehensivecustoms modernization programs is likely todisappoint. It would be illusory to expect goodvaluation practices in an administratively andtechnically ill-equipped customs department.Reforms should encompass the streamlining ofoperational procedures; the introduction of amodern customs control strategy based onselective checking, risk management, and post-clearance audit; professionalizing of the servicethrough appropriate personnel developmentand management policies, better salaries, andsustained training; and the introduction ofmodern forms of organization based on greaterautonomy coupled with accountability andtransparency.

• A greater part of TA should be redirected towardcomprehensive customs modernization projects.Valuation-specific TA needs to be concentratedon the development of valuation databases, riskanalysis and management systems, and post-clearance review and audit.

• The valuation function should be strengthenedby setting up an appropriate legal framework;establishing valuation control procedures basedon selective checking, risk analysis and manage-ment, and post-clearance audit; establishingcentral and regional valuation offices; and spe-cialized training.

• A valuation database should be established andconstantly updated.

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• Advance rulings on valuation should be intro-duced whenever possible, so as to speed up theclearance process and give importers assuranceof the tariff and tax burden.

• Hiring of PSI companies may be useful to assistcustoms in certain circumstances. The objectiveis to facilitate valuation work during the initialreform stages as capacity is being built up tocarry out the valuation function. However, ifand when PSI services are used, care needs to beexercised to make good use of these services tocomplement a sustainable customs moderniza-tion. Otherwise, governments should reconsiderrecourse to such services.

• When using private sector services, countriesshould take full advantage of the recentprograms that concentrate on selective priceverification, the building up of valuation data-bases, the development of risk managementsystems, and other important services. Theseappear better focused on the crucial needs ofACV implementation than older programs, andare less costly.

Annex 8.A Decision RegardingCases Where Customs Administra-tions Have Reasons to Doubtthe Truth Or Accuracy of theDeclared Value

Ministers invite the Committee on Customs Valua-tion established under the Agreement on Imple-mentation of Article VII of GATT 1994 (viz. Agree-ment on Customs Valuation) to take the followingdecision:

The Committee on Customs Valuation

Reaffirming that the transaction value is the pri-mary basis of valuation under the Agreement onImplementation of Article VII of GATT 1994 (here-inafter referred to as the ‘Agreement’);

Recognizing that the customs administrationmay have to address cases where it has reason todoubt the truth or accuracy of the particulars or ofdocuments produced by traders in support of adeclared value;

Emphasizing that in so doing the customsadministration should not prejudice the legitimatecommercial interests of traders;

Taking into account Article 17 of the Agreement,paragraph 6 of Annex III to the Agreement, and therelevant decisions of the Technical Committee onCustoms Valuation;

Decides as follows:

When a declaration has been presented and wherethe customs administration has reason to doubt thetruth or accuracy of the particulars or of documentsproduced in support of this declaration, the cus-toms administration may ask the importer to pro-vide further explanation, including providing docu-ments or other evidence, that the declared valuerepresents the total amount actually paid or payablefor the imported goods, adjusted in accordance withthe provisions of Article 8. If, after receiving furtherinformation, or in the absence of a response, thecustoms administration still has reasonable doubtsas to the truth or accuracy of the declared value, itmay, bearing in mind the provisions of Article 11, bedeemed that the customs value of the importedgoods cannot be determined under the provisionsof Article 1. Before making a final decision, the cus-toms administration shall communicate to theimporter, if requested, its grounds for doubting thetruth or accuracy of the particulars or documentsproduced and the importer shall be given a reason-able opportunity to respond. When a final decisionis made, the customs administration shall commu-nicate to the importer in writing its decision and thegrounds thereof.

It is entirely appropriate in applying the Agree-ment for one Member to assist another Member onmutually agreed terms.

Source: WTO 1994.

Annex 8.B Agreement on CustomsValuation: ImplementationRequirements

Implementation of the ACV requires the establish-ment of a legislative and regulatory framework, amechanism for judicial review, administrative pro-cedures, organizational structure, and training.

Legislation and Regulations

The provisions of the ACV need to be incorporatedin national law. While legislative practice in the

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 175

country may dictate the actual form, the valuationlegislation should be comprehensive, covering theACV and its interpretative notes, as well as a num-ber of specific provisions, including the following:

Exchange rate. How and when the exchange ratefor conversion of values expressed in foreign cur-rency shall be published, and whether the rate atthe time of exportation or at the time of importa-tion needs to be considered.

Right of appeal. The agreement requires thatmembers provide for the right of the importer toappeal, in relation to the determination of customsvalue, and provide for final appeal to the judiciary.A fair and independent review mechanism needs tobe established within the customs administrationin the first instance, with further right to an appealstribunal (if available) or to the judicial authority inthe second or third instance.

Release of goods before final determination ofvalue. The legislation must allow the importer towithdraw goods from customs control in situationsin which final determination of the customs valueis delayed, provided the importer posts a guaranteeto cover the duty liability that may result from thereview.

Transportation and insurance costs. National leg-islation needs to determine whether these costs areto be included in, or excluded from, the dutiablevalue (CIF or FOB basis of valuation).

Reasons to doubt. Nothing in the ACV shall beconstrued as restricting or calling into question therights of customs administrations to satisfy them-selves as to the truth or accuracy of any statement,document, or declaration presented for customsvaluation purposes.

Valuation Procedures and Control

The complexity of the valuation norm and itsapplication to actual transactions makes it neces-sary for customs to judiciously organize the valua-tion function in terms of policies, procedures, andorganizational setup. Customs valuation does notoperate in isolation of the overall clearance andcontrol system, but is a core element of it. The qual-ity of customs valuation depends on the quality ofthe customs administration overall, and the degreeto which it uses information technology applica-tions and implements modern control strategies.

Valuation procedures as complex as the ACVrequire, as a minimum, the following:

Value declaration self-assessment. The importerneeds to be made responsible for determining thevalue in accordance with the ACV. The importermust declare the essential elements affecting thedutiable value in a value declaration form, to bepresented or lodged electronically with the importdeclaration.

Limited and selective checking at time of clearance(local office). Checking at the time of clearance formost imports should be limited to determining theacceptability and validity of the declaration, and onthe basis of available information, identifyingwhether additional action is required, such as physi-cal inspection or submission of the matter to theregional or central valuation office.25 In computer-ized systems, selection for inspection or other actionwill normally be made by the systems on the basis ofa risk management program. Shipments should notbe retained because of value disputes, but clearedwith reservation as to the value and under securityfor additional duties that may be at stake.

Selective post-clearance release verification andaudit (regional office). As a general principle, valua-tion control should concentrate on post-clearanceverification and audit. The present days’ volume oftrade and the complexity of customs valuationmake effective valuation at the point of importa-tion impossible. Post-clearance checks should becarried out by the regional office, or in some coun-tries, the central valuation office. The selection ofdeclarations for post-clearance verification or auditshould be based on information from the risk man-agement system. Action may consist of documen-tary verification, or may include a physical inspec-tion, or consist of accounts-based checking at theimporter’s premises to examine in detail the condi-tions of the transaction.

Value information system and database. Informa-tion and data are needed for the following:

• to enable customs to detect cases of underin-voicing or overinvoicing

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25. Valuation does not require physical inspection in most cases.However, inspection may be needed to ensure correct identifica-tion of the type, brand name, model, serial number, and othercharacteristics of the goods, so as to allow for correct identifica-tion when a verification or audit is done later.

• to allow comparison of values for application ofACV Articles 2 (identical goods) and 3 (similargoods)

• to develop and update a risk analysis and man-agement system

• to enable the central and regional offices torespond to queries from the clearance offices.

The primary source of information for the valuedatabase is the price obtained from reliable, scruti-nized, recent import declarations. This informa-tion needs to be supplemented with data fromprice lists, catalogues, market research, and variousother sources. The information from the databaseshould not be taken at face value, but used forguidance in examining transactions. Taking thedata from the value database strictly would beinconsistent with the ACV and unacceptable as avaluation system.

Organizational Setup and Training

Effective organization for valuation requires theestablishment of a central valuation office, comple-mented with regional and local offices as neededbased on the size of the country and the overallorganization of the customs department. The cen-tral valuation office, unit, or division at headquar-ters is responsible for valuation policy, developingprocedures, supervising the correct and uniformimplementation by regional and local offices,ensuring adequate human resources and theirtraining, monitoring international developmentsconcerning valuation, serving as the importer’sfinal internal appeal stage on disputed value deci-sions, and maintaining relationships with relevantinstitutions (WCO, for example). Local andregional offices have an operational role asdescribed in the section on “Valuation Proceduresand Control.” The central office should develop thevalue database and the risk management system.The complexity of the ACV and the control strategy(post-clearance audit) require valuation specialiststrained in value legislation and procedures andauditing of company accounts.26

Annex 8.C Implementation IssuesRelated to WTO Bodies Under theDoha Ministerial Decision onImplementation-Related Issuesand Concerns

Paragraph 8.3: Agreement on Implementation ofArticle VII of GATT 1994 (Customs Valuation)

Ministerial Decision:The Ministerial Conference decides as follows:

8.3 Underlines the importance of strengtheningcooperation between the customs administrationsof Members in the prevention of customs fraud. Inthis regard, it is agreed that, further to the 1994Ministerial Decision Regarding Cases Where Cus-toms Administrations Have Reasons to Doubt theTruth or Accuracy of the Declared Value, when thecustoms administration of an importing Memberhas reasonable grounds to doubt the truth or accu-racy of the declared value, it may seek assistancefrom the customs administration of an exportingMember on the value of the good concerned. Insuch cases, the exporting Member shall offer coop-eration and assistance, consistent with its domesticlaws and procedures, including furnishing infor-mation on the export value of the good concerned.Any information provided in this context shall betreated in accordance with Article 10 of the Cus-toms Valuation Agreement. Furthermore, recogniz-ing the legitimate concerns expressed by the cus-toms administrations of several importingMembers on the accuracy of the declared value, theCommittee on Customs Valuation is directed toidentify and assess practical means to address suchconcerns, including the exchange of informationon export values and to report to the GeneralCouncil by the end of 2002 at the latest.

Consideration by the Customs ValuationCommittee:

This issue was considered by the Customs Valua-tion Committee, which reported to the GeneralCouncil in December 2002 (G/VAL/50), inter alia,that the Committee would require technical inputand advice to further evaluate all submissions andviews, which it had requested from the TechnicalCommittee on Customs Valuation (TCCV), andthat the TCCV was to conclude its examination andreport to the Committee by 15 May 2003 in orderthat the Committee might consider the technical

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 177

26. For more detailed information, see WCO (1996).

inputs and advice provided. The Committeerequested the General Council to take note of theprogress to date, to allow it to continue to workunder the existing mandate, and to establish anappropriate time for reporting on the matter.

Consideration by the General Council inDecember 2002:

The General Council considered the Commit-tee’s report in December 2002 (WT/GC/M/77).Following the discussion on the report, the GeneralCouncil took note of the report and of the progressto date and authorized the Committee to continueits work under the existing mandate and to reportback to the General Council once its work had beencompleted.

Follow up:The TCCV submitted its response to the Com-

mittee on 15 May 2003 (G/VAL/54), which was dis-

cussed at the Committee’s meeting on 23 May. TheCommittee agreed that its incoming Chairmanwould consult informally on how further workshould proceed and, in the meantime, suspended itsconsideration of this item. The Chairman is consult-ing with delegations and will report to the Commit-tee on the outcome of the consultations, at whichtime the Committee will decide on how to completeits mandate, including reporting to the GeneralCouncil.

Source: WTO document WT/MIN(01)/17of November 20, 2001, WTO document WT/GC/M/77 of February 13, 2003, Committee onCustoms Valuation Documents G/VAL/50 ofDecember 11, 2002 and G/VAL/54 of May 162003.

178 Customs Modernization Handbook

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

IFIA PSI Members Under Basis of Country Type Contracta Contract Split

Angola Customs BIVAC –Bangladesh Customs BIVAC, BSI-Inspectorate, Intertek GeographicalBenin Customs BIVAC –Burkina Faso Customs SGS –Burundi Forex/Customs SGS, Baltic Control Importers’ choiceCambodia Customs SGS –Cameroon Customs SGS –Central African Rep. Customs BIVAC –Chad Customs BIVAC –Comoros Customs COTECNA –Congo Customs BIVACCôte D’Ivoire Customs BIVAC, COTECNA Customs regimeb

Dem. Rep. of Congo Forex/Customs SGS –Ecuador Customs BIVAC, COTECNA, Intertek, SGS Importers’ choiceEthiopia Forex/Customs SGS –

Air & land freight/seaGhanac Customs BIVAC, COTECNA & othersd freight.Guinea Customs SGS –

BIVAC, BSI-INSPECTORATE, Importers’ choiceIndiae Quality/quantity SGS & othersc

Quality/quantity/ Open to any surveyor licensed to Importers’/exporters’Indonesiaf classification operate in country of supplyc choice

Quality/quantity/Indonesiag classification SGS –

BIVAC, COTECNA, BSI-INSPECTORATE, Intertek,

Iran, Islamic Rep. ofh Quality/quantity OMIC, SGS and othersc Importers’ choice

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

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 179

TABLE 8.D.1 (Continued)

IFIA PSI Members Under Basis of Country Type Contracta Contract Split

BIVAC, BSI-INSPECTORATE, –Iran, Islamic Rep. of Customs OMIC, SGS, IntertekKenya Customs COTECNA, BIVAC GeographicalLiberia Customs BIVAC –Madagascar Customs SGS –Malawi Forex/Customs Intertek –Mauritania Customs SGS –Mali Forex/Customs Cotecna –Mexicoi Customs BIVAC, Intertek, SGS Importers’ choiceMozambique Customs Intertek –Niger Customs COTECNA –Nigeria Forex/Customs COTECNA, Intertek, SGS GeographicalPeru Customs BIVAC, COTECNA, SGS Importers’ choiceRwanda Customs Intertek –Senegal Customs COTECNA –Sierra Leone Customs BIVAC –Tanzania Customs COTECNA –Togo Customs COTECNA –

Control Union Intl., Intertek, Uzbekistan Forex/Customs OMIC, SGS Importers’/exporters’

choiceVenezuela, R. B. de Customs BIVAC, COTECNA, Intertek, SGS Importers’ choiceZanzibarj Forex SGS –

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

Annex 8.E Checklist for CustomsValuations

• Is the valuation legislation fully in line with theWTO ACV?

• Has sufficient training been given to both cus-toms and importers, or their agents (brokers), tomake them fully understand and properly im-plement the ACV?

• Are value checks at the time of importation lim-ited and selective, and is selection based on a riskanalysis and management system?

• Is the valuation practice consistent with therequirements of the ACV, in particular:

– Does customs apply the transaction value ofthe imported goods as the primary method ofvaluation, and if the transaction value cannotbe accepted, does it apply the subsequent val-uation methods in strict hierarchical order?

– If customs has reasonable doubt about thedeclared value and deems that the transactionvalue method cannot be used, does it properlyconsult with the importer and give theimporter the opportunity to respond to cus-toms’ decision?

– Does the importer have a right to appeal thedecision of customs on the customs value,with first appeal to a higher administrativeauthority or an independent body, and finalappeal to a judicial authority?

• If the determination of the value cannot bemade at the time of importation, is a mecha-nism in place to release the goods provisionally,and solve the valuation questions after release?

• Is there a central valuation office at customsheadquarters, responsible for developing pro-cedures, supervising the correct and uniformimplementation of the ACV, ensuring adequatetraining, and developing or maintaining a cen-tral valuation database?

• Does customs have adequate numbers of staffspecially trained in customs valuation andauditing of company accounts?

• Does customs use a computerized database thatis updated continuously and in a timely manner?

• When using PSI services, are these services mon-itored against established criteria?

• Are the penalties for undervaluation adequate,are they realistic (neither too high, nor so low

that there is no deterrent), and are they beingeffectively applied?

Further Reading

Finger, Michael J., and Philip Schuler. 1999. “Implementation ofUruguay Round Commitments: The DevelopmentChallenge.” Policy Research Working Paper No. 2215.Washington, D.C.: The World Bank.

International Trade Center, and Commonwealth Secretariat.2001. “Frequently Asked Questions on Customs Valuation.”Geneva.

Low, Patrick. 1995. “Pre-Shipment Inspection Services.” WorldBank Discussion Paper No. 278. Washington, D.C.: TheWorld Bank.

Rege, Vinod. 2002. “Customs Valuation and Customs Reform.”In Bernard Hoekman, Aaditya Mattoo, and Philip English,eds. Development, Trade, and the WTO: A Handbook.Washington, D.C.: The World Bank.

WCO (World Customs Organization). 1996. “Brief Guide to theCustoms Valuation Code.” Brussels: WCO.

——. 1997. Compendium: Customs Valuation, with AmendingSupplements. Brussels: WCO.

——. Various Years. Legal Texts on Customs Valuation. SeeWCO Web site at www.WCOOMD.org/.

World Trade Organization. Various years. Customs ValuationAgreement, technical information, discussion papers, min-utes of meetings, working documents, decisions and recom-mendations, and other work of the Committee on CustomsValuation. See WTO Web site at http://www.wto.org/.

——. 1993. Agreement on Pre-Shipment Inspection. Geneva.www.wto.org/english/docs_e/legal_e/21-psi.pdf

References

The word processed describes informally reproduced works thatmay not commonly be available through libraries.

Anson, José, Olivier Cadot, and Marcelo Olarreaga. 2003. “TariffEvasion and Customs Corruption. Does Pre-ShipmentInspection Help?” Policy Research Working Paper No. 3156.Washington, D.C.: The World Bank.

Customs Cooperation Council. 1985. Customs Valuation, Eco-nomic Considerations. Document 31906E. Brussels.

Finger, Michael J., and Philip Schuler. 1999. “Implementation ofUruguay Round Commitments: The Development Chal-lenge.” Policy Research Working Paper No. 2215. Washing-ton, D.C.: The World Bank.

Goorman, Adrien. 2004. “Peru.” In Luc De Wulf and José B.Sokol, eds. Customs Modernization Initiatives. Washington,D.C.: The World Bank.

Low, Patrick. 1995. “Pre-Shipment Inspection Services.” WorldBank Discussion Paper No. 278. Washington, D.C.: TheWorld Bank.

Rege, Vinod. 2002. “Customs Valuation and Customs Reform.”In Bernard Hoekman, Aaditya Mattoo, and Philip English,eds., Development, Trade, and the WTO: A Handbook. Wash-ington, D.C.: The World Bank.

WCO (World Customs Organization). 1977. The Inter-national Convention on Mutual Administrative Assistancefor the Prevention, Investigation and Repression ofCustoms Offences. Signed in Nairobi on June 9, 1977.

180 Customs Modernization Handbook

www.wcoomd.org/ie/EN/Recommendations/naireng.pdf.

——. 1996. Brief Guide to the Customs Valuation Agreement.Brussels.

WTO (World Trade Organization). 1990. GATT DocumentMTN.GNG/NG8/W/73. Geneva.

——. 1993. Agreement on Pre-Shipment Inspection. Geneva.www.wto.org/english/docs_e/legal_e/21-psi.pdf

——. 1994. Agreement on Customs Valuation. Decision 6.1.Geneva.

——. 2001. “Implementation-Related Issues and Concerns.”WTO Document WT/MIN(01)/17. November 20.

——. 2002. Compilation of Discussions in Various WTO Bodieson Implementation-Related Issues Concerning CustomsValuation—Background Note by the Secretariat. DocumentG/VAL/W/97 of March 26, 2002. Geneva.

Yang, Dean. 2003. “How Easily Do Lawbreakers Adapt toIncreased Enforcement? Philippine Smugglers’ Responses toa Common Customs Reform.” University of Michigan.Processed.

Customs Valuation in Developing Countries and the World Trade Organization Valuation Rules 181

183

9RULES OF ORIGIN, TRADE,

AND CUSTOMS

Paul Brenton and Hiroshi Imagawa

TABLE OF CONTENTS

Defining Origin 184

Methods for Determining SubstantialTransformation 185

Status of the Harmonization Work Programfor Nonpreferential Rules of Origin 187

The Definition of Preferential Rulesof Origin 191

Rules of Origin in Existing Free Trade andPreferential Trade Agreements 197

The Economic Implications of Rulesof Origin 199

Rules of Origin and the Utilization of TradePreferences 200

Rules of Origin and EconomicDevelopment 202

Customs and the Costs of AdministeringPreferential Rules of Origin 204

The Doha Round and Rules of Origin 208

Key Operational Conclusions 209

Annex 9.A Summary of the Different Approachesto Determining Origin 210

Annex 9.B Rules of Origin in Existing Free Tradeand Preferential Trade Agreements 211

Further Reading 212

References 212

LIST OF TABLES

9.1 Involvement of Customs in Issuing, Checking,and Providing Information on PreferentialCertificates of Origin for Exporters 205

9.2 Resource Implications of Rules of Origin inPreferential Trade Agreements 206

9.3 Resource Implications of Rules of Origin inPreferential Trade Agreements 208

9.A.1 Summary of the Different Approaches toDetermining Origin 210

9.B.1 Rules of Origin in Existing Free Trade andPreferential Trade Agreements 211

LIST OF FIGURES

9.1 Regional Trade Agreements in Eastern andSouthern Africa 207

LIST OF BOXES

9.1 Example of Restrictive Rules of Origin: TheCase of EU Imports of Fish 192

9.2 More Restrictive Rules of Origin: The Case ofClothing Under NAFTA Rules 197

This chapter has benefited from the comments and suggestionsof Antoni Estevadeordal, Moshe Hirsch, Holm Kappler, KunioMikuriya, Mark Pearson, and Kati Suominen, to whom theauthors are most grateful. This paper reflects the views of theauthors and should not in any way be attributed to the organiza-tions with which they are or have been affiliated.

Determining the country of origin or “nationality”of imported products is a requirement for applyingbasic trade policy measures such as tariffs, quanti-tative restrictions, antidumping and countervailingduties, and safeguard measures as well as for

requirements relating to origin marking, publicprocurement, and for statistical purposes. Suchobjectives are met through the application of basicor nonpreferential rules of origin. Countries thatoffer zero or reduced duty access to imports fromcertain trade partners will apply another and oftendifferent set of preferential rules of origin to deter-mine the eligibility of products to receive preferen-tial access. The justification for preferential rules oforigin is to prevent trade deflection, or simpletransshipment, whereby products from nonpre-ferred countries are redirected through a free tradepartner to avoid the payment of customs duties.Hence the role of preferential rules of origin is toensure that only goods originating in participatingcountries enjoy preferences. Therefore, preferentialrules of origin are integral parts of preferentialtrade agreements such as bilateral and regional freetrade agreements and the nonreciprocal prefer-ences that industrial countries offer to developingcountries.

The nature of rules of origin and their applica-tion can have profound implications for trade flowsand for the work of customs. Rules of origin can bedesigned in such a way as to restrict trade andtherefore can and have been used as trade policyinstruments. The proliferation of free trade agree-ments with accompanying preferential rules of ori-gin is increasing the burdens on customs in manycountries with consequent implications for tradefacilitation. Perhaps surprisingly, given their poten-tial to influence trade flows, rules of origin is onearea of trade policy that has been subject to very lit-tle discipline during the almost 50 years of the mul-tilateral rules–based system governed by theGeneral Agreement on Tariffs and Trade (GATT)and more recently the World Trade Organization(WTO). It is also worth noting that during thisperiod the determination of the country of originof products has become more difficult as techno-logical change, declining transport costs, and theprocess of globalization have led to the splitting upof production chains and the distribution of differ-ent elements in the production of a good to differ-ent locations. The issue becomes which one ormore of these stages of production define the coun-try of origin of the good.

This chapter seeks to summarize the key issuesrelating to both preferential and nonpreferentialrules of origin and to highlight the economic

impact that rules of origin can have. It concentrateson the implications of rules of origin for customs,drawing on a recent survey of customs administra-tions throughout the world. The main conclusion isthat the specification and implementation of rulesof origin can have significant effects both ontraders and on the work of customs. Complex rulesof origin that differ across countries and agree-ments can be a significant constraint on trade anda substantial burden on customs and on theimprovement of trade facilitation. The nature ofthe rules of origin can act to undermine the statedintentions of preferential trade agreements.

The first section of this chapter explains whatis meant by origin. The second section examinesmethods for determining substantial transforma-tion. The third section discusses the current situa-tion with regard to nonpreferential rules of origin,where a concerted attempt (yet to bear fruit) hasbeen made to harmonize the rules regarding whollyobtained products and substantial transformation.The fourth section elaborates on the definition ofpreferential rules of origin for which, to date, therehas been no attempt to achieve harmonization andfor which there are no real and effective multilateraldisciplines. The fifth section looks at the rules oforigin in existing free trade and preferential tradeagreements. The sixth section reviews the economicimplications of rules of origin. The seventh sectiondiscusses the links between the rules of origin andthe use of trade preferences. The eighth sectionanalyzes the use of the rules of origin as a tool ofeconomic development. The ninth section dealswith the costs of administering preferential rules oforigin by customs. The tenth section looks at theDoha Round and the rules of origin. The final sec-tion provides some operational conclusions.

Defining Origin

When a product is produced in a single stage or iswholly obtained in one country the origin of theproduct is relatively easy to establish. This appliesmainly to natural products and goods madeentirely from them and hence products that do notcontain imported parts or materials. Proof that theproduct was produced or obtained in the preferen-tial trade partner is normally sufficient. For allother cases in which two or more countries havetaken part in the production of the good, the rules

184 Customs Modernization Handbook

Rules of Origin, Trade, and Customs 185

of origin define the methods by which it can bedetermined in which country the particular prod-uct has undergone sufficient working or processingor has been subject to a substantial transformation(in general these terms can be used interchange-ably). A substantial transformation is one that con-veys to the product its essential character.

Methods for DeterminingSubstantial Transformation

Unfortunately, there is no simple and standard ruleof origin that can be identified as determining thenationality of a product. The International Con-vention on the Simplification and Harmonizationof Customs Procedures (the Revised Kyoto Con-vention) defines (in Annex D1 to the convention)the three main techniques for the determination oforigin: change of tariff classification, value-added,and specific manufacturing process.

Change of Tariff Classification

Origin is granted if the exported product falls into adifferent part of the tariff classification to anyimported inputs that are used in its production.This tariff-shift method forms the basis of theefforts by the World Customs Organization (WCO)to harmonize nonpreferential rules of origin.Application of this approach has been enabledby the widespread adoption of the HarmonizedSystem (HS) whereby the majority of countriesthroughout the world (more than 190) are nowclassifying goods according to the same harmo-nized categories. There is, however, the issue of thelevel of the classification at which change isrequired. Typically it is specified that the changeshould take place at the heading level (that is, at thefour-digit level of the HS).1 The following areexamples of simple HS headings:

• beer made from malt (HS 2203) • umbrellas and sun umbrellas (HS 6601).

The following is an example of a more sophisti-cated heading:

Machinery, plant or laboratory equipment,whether or not electrically heated (excludingfurnaces, ovens and other equipment of heading8514), for the treatment of materials by aprocess involving a change of temperature suchas heating, cooking, roasting, distilling, rectify-ing, sterilizing, pasteurizing, steaming, drying,evaporating, vaporizing, condensing or cooling,other than machinery or plant of a kind used fordomestic purposes; instantaneous or storagewater heaters, non-electric (HS 8419).

However, the HS was not designed specifically asa vehicle for conferring country of origin; its pur-pose is to provide a unified commodity classifica-tion for defining tariff schedules and for the collec-tion of statistics. Thus, in particular cases it can beargued that change of tariff heading will not iden-tify substantial transformation, while in other casessubstantial transformation can occur withoutchange of tariff heading. As a result, schemes usingthe change of tariff heading criterion usually pro-vide for a wide range of exceptions so that othercriteria must be satisfied to confer origin.

The change of tariff classification can provide botha positive test of origin, by stating the tariff classifica-tion of imported inputs that can be used in the pro-duction of the exported good (for example, those in adifferent heading), and a negative test by stating caseswhere change of tariff classification will not conferorigin. For example, in the North American FreeTrade Agreement (NAFTA) the rule of origin forTomato Ketchup, which is defined at the subheadingor six-digit level of the HS, states that a change toKetchup (HS 210320) from imported inputs of anychapter will confer origin except subheading 200290(Tomato Paste). In other words, any ketchup madefrom imported fresh tomatoes will confer origin butketchup made from tomato paste imported from out-side the area will not qualify for preferential treatmenteven though the basic change of tariff classificationrequirement has been satisfied.2 In European Union(EU) preferential rules of origin, bread, biscuits andpastry products (HS 1905) can be made from anyimported products except those of chapter 11, whichincludes flour, the basic input to these products.

1. The Harmonized System comprises 96 chapters (two-digitlevel), 1,241 headings (four-digit level), and around 5,000 sub-headings (six-digit level).

2. The apparent reason for this rule in NAFTA is to protect pro-ducers of tomato paste in Mexico from competition from pro-ducers in Chile. See Palmeter (1997).

The World Trade Organization (WTO) Agree-ment on Rules of Origin (the Origin Agreement orARO) stipulates that preferential and nonpreferen-tial rules of origin should be based on a positivestandard. However, it allows the use of negativestandards (a definition of what does not confer ori-gin) if they “clarify a positive standard.” The latter issufficiently vague as to have had very little impactso that EU and NAFTA rules of origin, for example,are rife with negative standards.

Thus, while in principle the change of tariffclassification can provide for a simple uniformmethod of determining origin, in practice insteadof a general rule there are often many individualrules. Nevertheless, the change of tariff classifica-tion rule, once defined, is clear, unambiguous,and easy for traders to learn. It is relativelystraightforward to implement. In terms of docu-mentary requirements it requires that traderskeep records that show the tariff classification ofthe final product and all the imported inputs.This may be undemanding if the exporter directlyimports the inputs but may be more difficult ifthey are purchased from intermediaries in thedomestic market.

Value-Added

When the value-added in a particular countryexceeds a specified percentage, the goods aredefined as originating in that country. This crite-rion can be defined in two ways, either as the mini-mum percentage of the value of the product thatmust be added in the country of origin or as themaximum percentage of imported inputs in totalinputs or in the value of the product.

As in the case of change of tariff classification,the value-added rule has the advantage of beingclear, simple, and unambiguous in its definition.However, in actual application the value-addedrule can become complex and uncertain. First,there is the issue of the valuation of materials,which may be based upon ex-works, FOB, CIF, orinto-factory prices. Each method of valuation willgive a different, here ascending, value of nonorigi-nating materials. Second, the application of thismethod can be costly for firms who will requiresophisticated accounting systems and the ability toresolve often complex accounting questions.Finally, under the value-added method origin is

sensitive to changes in the factors determiningproduction cost differentials across countries, suchas exchange rates, wages, and commodity prices.For example, operations that confer origin in onelocation may not do so in another because of dif-ferences in wage costs. An operation that confersorigin today may not do so tomorrow if exchangerates change.

Specific Manufacturing Process

This criterion delineates for each product or prod-uct group certain manufacturing or processingoperations that define origin (positive test), ormanufacturing or processing procedures that donot confer origin (negative test). The formulationof these rules can require the use of certain origi-nating inputs or prohibit the use of certain non-originating inputs. For example, EU rules of originfor clothing products stipulate “manufacture fromyarn,” while the rule for tube or pipe fittings ofstainless steel stipulates “turning, drilling, reaming,threading, deburring and sandblasting of forgedblanks.”3

The main advantage of specific manufacturingprocess rules is that once defined they are clearand unambiguous so that from the outset produc-ers are able to clearly identify whether their prod-uct is originating or not. However, there are also anumber of drawbacks with this system, includingobsolescence following changes in technologyand the documentary requirements, such as anup-to-date inventory of production processes,which may be burdensome and difficult to complywith.

Table 9.A.1 in annex 9.A summarizes the mainadvantages and disadvantages of these differentmethods of determining sufficient processing orsubstantial transformation. No one rule domi-nates others as a mechanism for formally identify-ing the nationality of all products. Each has itsadvantages and disadvantages. However, it is clearthat different rules of origin can lead to differentdeterminations of origin. For example, in the caseof nonpreferential rules of origin, the UnitedStates changed its rules for textile and clothing

186 Customs Modernization Handbook

3. The rule for this product also requires that the total value ofthe forged blanks should not exceed 35 percent of the ex-worksprice of the product.

products in 1996 in a way that changed the originof products previously deemed as being of Euro-pean origin as originating in Asian countries andhence subject to quantitative restrictions underthe Agreement on Textiles and Clothing. Thesechanges also required that products such as silkscarves previously labeled “made in Italy” had tobe relabeled “made in Pakistan,” with implicationsfor the purchasing decisions of consumers whotake the country of origin indicated on such labelsas an indicator of quality (Dehousse, Ghemar, andVincent 2002).

In the late 1980s, the EU changed its nonprefer-ential rules of origin for photocopiers to ensurethat the operations carried out in the United Statesby a subsidiary of a Japanese company did not con-fer origin to the U.S. The products concerned weredeemed to be originating in Japan and subject toantidumping duties (Hirsch 2002). Under prefer-ential schemes, producers who are eligible for pref-erential access to different markets under differentschemes with different rules of origin may find thattheir product qualifies under some schemes but notothers. For example, a company in a developingcountry may find that its product qualifies for pref-erential access to the EU market under the EU’sGeneral System of Preferences (GSP) scheme butthat the exact same product does not satisfy therules of origin of the U.S. GSP scheme.

While it is difficult to derive specific recommen-dations with regard to the best approach to thedesign of rules of origin, certain general proposi-tions can be made which apply to both preferentialand nonpreferential rules of origin:

• Rules of origin should be simple but precise,transparent, predictable, and stable. Rules oforigin should avoid or minimize scope for inter-pretation and administrative discretion.

• Rules of origin should be designed to have theleast trade distorting impact and should notbecome a disguised nontariff barrier to trade.Protectionist lobbying should not compromisethe specification of the rules of origin.

• As much as possible the rules should be consis-tent across products and across agreements. Thegreater the inconsistencies, the greater the com-plexity of the system of rules of origin both forcompanies and for officials administering thevarious trade schemes.

Status of the Harmonization WorkProgram for NonpreferentialRules of Origin

Harmonization of rules of origin has long been adream of customs and trade officials. Under theGeneral Agreement on Tariffs and Trade (GATT,established 1947) the contracting parties to theGATT were free to determine their own rules oforigin. Nevertheless, records show that the GATTfirst considered the harmonization of rules of ori-gin in 1951. Two years later, in 1953, following arecommendation from the International Chamberof Commerce for the adoption of a commondefinition of nationality of manufactured goods,a GATT working party was established on the“Nationality of Imported Goods” and examinedboth the definition of origin and proof of origin.

Despite the fact that these early GATT attemptswere not successful, the WCO took a significant stepforward through the establishment of the Interna-tional Convention on the Simplification and Har-monization of Customs Procedures (the RevisedKyoto Convention) that came into force in 1974.Annexes D.1 to D.3 to the convention deal withrules of origin, including administrative matters.Although not many members have ratified theseannexes,4 the annexes have been influential becausethey set out the first international standards ormodels in the field of origin. For instance, a numberof existing preferential and nonpreferential rules oforigin, including those of non-contracting partiesto the Revised Kyoto Convention, have adoptedsimilar or almost identical definitions of whollyobtained goods as those set out in Annex D.1. Butwith regard to manufactured goods, that annex doesnot provide a single set of standard rules of originconcerning the criteria for identifying a substantialtransformation. Instead, it explains the most com-monly used criteria—change in tariff classification,value-added, and specific manufacturing or pro-cessing operations—and suggests recommendedpractices with regard to their use. Nevertheless, each

Rules of Origin, Trade, and Customs 187

4. There are 31 annexes to the Revised Kyoto Convention. Con-tracting parties to the convention do not have to accept all theannexes, but they are required to notify the Secretary General ofthe WCO that they accept one or more annexes. Out of the63 current contracting parties to the convention, 26 membershave accepted Annex D.1, 25 have accepted Annex D.2, and8 have accepted Annex D.3). A particular annex enters into forcewhen at least five members ratify or accede to that annex.

administration has remained free to choose any oneor combination of those criteria and to specify thosecriteria how they wish.

With regard to the change of tariff classificationrule, the underlying technical constraint to harmo-nization in the past was the absence of a commoninternationally agreed on tool for classifying prod-ucts. Different countries could classify the samegood in different ways. A major breakthrough camein 1988 with the entry into force of the Harmo-nized System so that all major trading nations nowuse the same classification system for coding prod-ucts for customs and for statistical purposes.5

However, because of the trade policy implications(antidumping measures, for example), attempts toharmonize rules of origin only occurred followinginclusion of the issue on the negotiating agenda ofa large-scale multilateral trade negotiation, theUruguay Round of GATT negotiations.

The Uruguay Round and the Agreement on Rules of Origin

During the June 1989 Uruguay Round meetings,Japan proposed to negotiate the harmonization ofpreferential and nonpreferential rules of origin, aswell as a mechanism for notification, consultation,and dispute settlement. This was motivated, amongother things, by a series of trade disputes during the1980s between Japan and other East Asian coun-tries, on the one hand, and their major tradingpartners, on the other. Some of these trade disputesstemmed from the application of rules of origin inconjunction with antidumping proceedings. Whilethe United States endorsed the idea to include thisissue on the Uruguay Round agenda, the EuropeanCommunity and the European Free Trade Associa-tion (EFTA) countries were initially reluctant. Theyconsidered the issue better suited to the more tech-nical WCO and believed that the discussion shouldnot address the rules of origin used under preferen-tial arrangements (Croome 1995).

In February 1990, agreement was reached that thenegotiating group should define policy principles(for example, nondiscrimination, transparency,

predictability) to govern the application of rulesof origin. Another compromise agreement wasreached prior to the Brussels Ministerial Meeting inDecember 1990 that the harmonized rules of originshould cover nonpreferential trade only. A nonbind-ing common declaration with regard to preferentialrules of origin was agreed to at this meeting. Thiscontained a number of general exhortations tomembers to make their preferential rules clear, tobase them on a positive standard, to publish them inaccordance with GATT rules, and to assert thatchanges should not be applied retroactively and thatjudicial review should be available.

The outcome of these negotiations was com-piled as an Agreement on Rules of Origin annexedto the Marrakesh Agreement Establishing theWorld Trade Organization, which entered intoforce in January 1995. The Origin Agreement man-dated the Technical Committee on Rules of Origin(TCRO) under the auspices of the WCO and theCommittee on Rules of Origin (CRO) under theWTO to undertake a Harmonization Work Pro-gram (HWP) for nonpreferential rules of origin, tobe completed within a three-year period. Under theOrigin Agreement, members are obliged to adhereto the following disciplines after the implementa-tion of the results of the HWP (Article 3: Disci-plines after the Transition Period):

• Rules of origin are applied equally for all pur-poses (for example, application of most favorednation [MFN] treatment, antidumping andcountervailing duties, safeguard measures, ori-gin marking requirements, any discriminatoryquantitative restrictions or tariff quotas, govern-ment procurement, trade statistics).

• Rules of origin determine origin of goods eitherby definition of wholly obtained goods or thesubstantial transformation criteria.

• Rules of origin observe national treatment andMFN requirements.

• Rules of origin must be administered in a con-sistent, uniform, impartial, and reasonablemanner.

• Laws, regulations, judicial decisions, and admin-istrative rulings of general application relatingto rules of origin must be published.

• Origin assessments must be provided, uponrequest, within 150 days (and be valid for threeyears).

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5. The HS is used by over 190 countries and customs or eco-nomic unions (including 112 contracting parties to the HS Con-vention), representing about 98 percent of world trade (as of thetime of writing).

• Changes in rules of origin are not to be appliedretroactively.

• Any administrative action regarding the deter-mination of origin is subject to possible review.

• Confidentiality of information must be observed.

The Harmonization Work Program and the DraftHarmonized Nonpreferential Rules of Origin

Imagawa and Vermulst, in Rules of Origin in a Glob-alized World: A Work in Progress (2003) studied theissue of the HWP and rules of origin, and thisforms the basis of the following discussion.

From its inaugural session in February 1995, theTCRO undertook technical work, developing defi-nitions of wholly obtained goods and minimaloperations or processes and elaborating upon sub-stantial transformation criteria. At the same time,the Geneva-based CRO has carried out the policywork, including endorsing the results of theTCRO’s technical review. It took nearly four years(and 20 formal and informal sessions) for theTCRO to complete its technical review. A key fea-ture of this process was discussion of the rules on aproduct-by-product basis, as dictated by the OriginAgreement.6 The work of the TCRO was submittedto the CRO in May 1999. The TCRO agreed toproduct-specific rules for over 500 of 1,241 head-ings; 486 issues7 were referred to the CRO. TheCRO has continued the HWP based on the resultsof the TCRO’s technical review and has substan-tially narrowed the number of outstanding issues.8

In September 2002, 94 core policy issues werereferred to the WTO General Council and negotia-tions at the ambassadorial level still continue.9 The

General Council has mainly argued about the so-called “implications issue” as to whether the har-monized nonpreferential rules of origin (HRO)should be applied on a mandatory basis to otherWTO instruments, in particular antidumping andcountervailing duty proceedings.10 Despite all itsefforts, the WTO has not been able to complete theHWP; the deadline has been exceeded severaltimes.

What are the underlying factors that have hin-dered the completion of the HWP? The process ofharmonization has required the standardization ofdefinitions, rules, and practices that differ acrosscountries and regions. This has required a consen-sus-building approach that has been time consum-ing because the issues were highly technical and thework involved was extremely voluminous and laborintensive; the disparity among delegations withregard to technical arguments on certain crucialproduct-specific and other issues was deeply rootedin national industrial and trade policy, so membershad to be ready to change the national policy inquestion if they accepted an alternative position.The Origin Agreement itself (Article 9.2c) requiredthat the harmonization work of the TCRO be “con-ducted on a product sector basis, as represented byvarious chapters or sections of the HS nomencla-ture.” This reflects the view of those who believethat such an approach is necessary to achieve non-preferential origin rules that are “objective, under-standable and predictable,” the objectives definedin the Origin Agreement. However, it appears thatwhen negotiations are conducted on a product-by-product basis it is inevitable that specific domesticinterest groups will become involved, ensuring thatdifferent countries adopt different and often en-trenched positions.

It is important to note that most of the coreproblems relating to product-specific rules that arestill to be resolved relate to products of particularrelevance in the exports of developing countries. Ofthe 94 remaining key product-specific issues, 69 (or75 percent) are concerned with agricultural prod-ucts (45) and textiles and clothing (24) (WTO

Rules of Origin, Trade, and Customs 189

6. The Origin Agreement denies the possibility of a conceptualdefinition of substantial transformation in terms of a simplerule, based, it seems, on the assumption that such a rule wouldlack precision and would be difficult to implement. Instead, theTCRO is mandated to “consider” use of change of tariff sub-heading or heading on a product basis (Art. 9.2(c)(ii)), althoughthe supplementary use of other methods is provided for.

7. The scope of an issue varies from one split (sub) heading toseveral HS chapters. Consequently, the fact that 486 issues existdoes not mean that there are unresolved product-specific rulesfor 486 headings.

8. By the end of 2002, 349 issues out of 486 had been resolved bythe CRO (WTO 2002c).

9. The CRO was to complete its work by year end 2001. The dead-line was initially extended to July 2003 for 94 core policy issues andDecember 2003 for the remaining technical work. These deadlineswere extended to July 2004 and December 2004, respectively.

10. According to the WTO Secretariat, strong support hasemerged among delegations for the notion that “whenever thereis a mandatory legal requirement in the determination of originin the WTO Agreement other than the Agreement on Rules ofOrigin, the harmonized rules of origin must be used” (see WCO2003).

2002c). These are products that are subject to thehighest levels of protection in industrialized coun-tries. Only 10 percent of the outstanding issuesconcern engineering products, which dominate theexports of the industrialized countries.

The draft HRO consists of Definitions, GeneralRules, and two appendixes. When the HWP is com-pleted, the results will be annexed to the OriginAgreement as an integral part thereof (Article 9.4).Definitions and General Rules are general provi-sions governing the entire HRO. Appendix 1 setsout two rules and definitions for wholly obtainedgoods, which evolved from the current Kyoto defi-nitions. It consists of two parts: goods whollyobtained in one country and products taken fromoutside the country (such as from the high seas). Itis the latter group that is still under discussion inthe WTO. Appendix 2 consists of product-specificrules of origin for goods that are not whollyobtained (there is a sequential application of thesetwo appendixes with Appendix 1 having prece-dence over Appendix 2). Seven rules, which are tobe applied for the purposes of Appendix 2 only,have been proposed and largely agreed on. Rule 3 isthe core (Determination of Origin) and sets out aseries of provisions to be applied in sequence.

In these rules product-specific requirements areset out for each HS heading or subheading. Twotypes of rules are specified, primary and residualrules. Primary rules, in the form of change-in-tariff-classification, value-added, or specific-process rules,or a combination of these rules, are applied first(there is a sequential application between the pri-mary and residual rules). There is no precedenceamong these different primary rules, that is, the pri-mary rules are considered to be equal. Regardless ofthe placement of the rules, that is, at the chapter,heading, or subheading level of the HS, there is nohierarchy among them. The residual rules deter-mine the country of origin of a good that fails tomeet the primary rule, such as a change of headingrule. It is worth noting that while preferential rulesof origin lead to either a “yes” (qualified) or “no”(not qualified) answer, under the HRO a decisiondefining the country of origin must ultimately bemade; there will be no good for which the countryof origin cannot be determined. Residual rules dohave a hierarchical structure, with those defined forspecific products at the chapter level taking prece-dence over the general residual rules.

Implementing the HRO: Implications

The benefits of harmonized rules of origin to theglobalized world economy cannot be overstated.The application of a single set of rules of originfor the various nonpreferential purposes would savetime and cost to traders and customs officers all overthe world. It would add to the certainty and pre-dictability of trade by ensuring consistency of origindetermination across countries and across time.Harmonized nonpreferential rules of origin wouldalso help to avoid potential trade disputes arisingfrom uncertainties in the determination of the coun-try of origin with regard to antidumping and coun-tervailing duties, safeguard measures, origin markingrequirements, quantitative restrictions or tariff ratequotas, and government procurement decisions.

The WTO Secretariat has been notified that, asof the time of writing, 41 WTO members do notuse nonpreferential rules of origin in their customsand trading systems.11 When the HRO are estab-lished as an integral part of the ARO, these mem-bers will be expected to reform their legislative andadministrative systems as follows:

Legislative Matters• For those countries that do not have nonprefer-

ential rules of origin, there will be a need toadopt and implement the HRO.

• For those countries that have one or more non-preferential rules of origin, those rules will haveto be aligned to the HRO and implemented.

• Because the TCRO preferred not to harmonizethe procedural matters of the HRO, each countrywill need to establish or modify its national rulesto implement the HRO according to domesticlegislative or administrative procedures.

Organizational Structure• For those countries that do not have central and

regional units responsible for the HRO, a properorganizational structure to implement the HROwill become necessary.

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11. These members are: Bolivia; Brazil; Brunei Darussalam;Burundi; Chad; Chile; Costa Rica; Cyprus; Dominica; DominicanRepublic; El Salvador; Fiji; Guatemala; Haiti; Honduras; Iceland;India; Indonesia; Jamaica; Kenya; Macao, China; Malaysia; Mal-dives; Malta; Mauritius; Mongolia; Namibia; Nicaragua; Oman;Pakistan; Panama; Papua New Guinea; Paraguay; Philippines;Singapore; Suriname; Thailand; Trinidad and Tobago; Uganda;United Arab Emirates; and Uruguay (WTO 2002b).

Capacity Building and Disseminationof Information• For those countries that do not have nonprefer-

ential rules of origin, extensive training andorientation programs for customs officials, tradeofficials, and traders must be planned and con-ducted in time for the implementation of theHRO. Therefore, international organizations,such as the WCO, and donor countries mightwish to take this need into account in their plan-ning activities.

• For those countries that have one or more non-preferential rules of origin, the changes betweenpresent and future rules need to be communi-cated to customs officials, trade officials, andtraders.

The Harmonization of Nonpreferential Rulesof Origin: Conclusions

After nearly a decade of negotiations, an increas-ingly defined shape of the HRO has emerged. TheHRO are guided by the clear principles laid downin the ARO. From the technical point of view, ithas been observed that members cannot pursueabsolute consistency between product-specificrules of origin as long as the results of the HWP arethe fruit of compromise. However, such a fact doesnot undermine the benefit of having harmonizednonpreferential rules of origin. Transparency andconsistency in origin determination cannot beensured without a clear standard. Nevertheless, theexistence of a far-from-perfect standard is betterthan the absence of any standard whatsoever, asshown by the benefits of introducing the HS, whichhas led to the benefits of a “common language” forpurposes of classification. Thus, whatever theapplicable rules of origin are, once harmonized,those rules are the same both in the exporting andin the importing country. In a highly intercon-nected world there can be substantial benefits fromhaving a single set of rules applied in all WTOmember countries.

A further advantage of harmonized nonprefer-ential rules of origin would be that they would pro-vide a benchmark by which to assess rules of originapplied on preferential trade flows. Countries seek-ing rules of origin that deviate from the nonprefer-ential rules could be asked by partners to explicitlyjustify why the nonpreferential rules of origin are

insufficient. It is in this context that the chapternow proceeds to a more detailed discussion of thepreferential rules of origin and their impact ontrade and customs.

The Definition of PreferentialRules of Origin

Preferential rules of origin define the conditionsthat a product must satisfy to be deemed as origi-nating in a country that is eligible for preferentialaccess to a partner’s market and has not simplybeen transshipped from a nonqualifying country orbeen subject to only minimal processing. In prac-tice, the greater the level of work that is required bythe rules of origin, the more difficult it is to satisfythose rules and the more restrictive those rules arein constraining market access relative to what isrequired simply to prevent trade deflection. This isparticularly true for small less-diversified develop-ing economies. Thus, the higher the amount ofdomestic value-added required by a value-addedrule, the more difficult it will be to comply with,because there will be less scope for the use ofimported parts and materials. A rule of origin thatprevents the use of imported flour in the produc-tion of pastry products such as biscuits, for exam-ple, will be excessively restrictive for countries thatdo not have a competitive milling industry.

Preferential rules of origin often differ fromnonpreferential rules. In the main it is the require-ments relating to specific processing that vary andare usually more demanding in preferential tradeagreements. However, there are also cases, some ofthem initially rather surprising, where rules relat-ing to what would appear to be wholly obtainedproducts are more restrictive in preferential tradeagreements. (See box 9.1 for such an example.)

Methods for Determining Sufficient Processing

With regard to requirements relating to sufficientprocessing, change of tariff classification is used inthe vast majority of current preferential tradeagreements and is featured in both EU agreementsand NAFTA. WTO research shows that of 87 freetrade agreements (FTAs) and other preferentialtrade agreements investigated, 83 used change oftariff classification in the determination of origin(WTO 2002a). Most agreements specify that the

Rules of Origin, Trade, and Customs 191

change should take place at the heading level (thatis at the four-digit level), although in many agree-ments, especially those involving the EU and inNAFTA, the tariff shift requirement varies acrossdifferent products. For example, other researchshows that in NAFTA, while around 40 percent oftariff lines require change of tariff heading, formost tariff lines (54 percent) it is change of chapter(two-digit level) that is required (Estevadeordaland Suominen 2003). The requirement of changeof chapter is more restrictive than change of head-ing. For a small number of products in NAFTA it isonly change of subheading that is required.

While change of tariff heading is used in themajority of preferential trade agreements, it is sel-dom the only method applied. It is also importantto note that in some agreements, for example, thoseinvolving the EU, change of tariff classification isapplied to some products while the other methods(value-added rules and specific technical processes)will be applied to other products. In the NAFTArules of origin, all rules tend to require at least

change of tariff classification, but the level at whichchange is required varies across products. This typi-cally leads to considerable complications for cus-toms officials in the determination of origin in pref-erential agreements. In contrast, many of theagreements involving developing countries tend toprovide general rules of origin and eschew thedetailed product-by-product approach adopted bythe EU and NAFTA. Further, in EU agreementsand in NAFTA for certain products, rules will bestipulated that require satisfaction of more than onemethod to confer origin. This is clearly more restric-tive than a requirement to satisfy a single method.For example, in NAFTA rules of origin, the require-ment for passenger motor vehicles (HS 870321) is achange to subheading 8703.21 from any other head-ing, provided there is a regional value content of notless than 50 percent under the net cost method.

In some agreements for certain products, two ormore methods will be stipulated and satisfaction ofany one of the methods will be sufficient to conferorigin. For example, in the EU rules of origin, the

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

On the face of it, determining the origin of fish,fresh or chilled, would appear to be straightfor-ward with origin being conferred to the countrywhose trawler caught the fish; there is, after all,no apparent import content in the fish. How-ever, in practice the determination of origin forfish caught outside territorial waters but withinthe exclusive economic zone of a country can becomplex. To receive preferential access to the EUunder the GSP, all of the following conditionsmust be satisfied:

• The vessel must be registered in the benefici-ary country or in the EU.

• The vessel must sail under the flag of the ben-eficiary country or of a member state of theEU.

• The vessel must be at least 60 percent ownedby nationals of the beneficiary country or theEU or by companies with a head office ineither the beneficiary country or an EU state ofwhich the chairman and a majority of theboard members are nationals.

• The master and the officers must be nationalsof the beneficiary country or an EU memberand at least 75 percent of the crew must benationals of the beneficiary country or the EU.

Under the EU’s Cotonou Agreement, whichgives preferential access to the EU market tocountries in Africa, the Caribbean, and thePacific (ACP), the rules of origin for fish areslightly different and a little more liberal thanthose for GSP countries:

• The vessel must be registered in the EU or anyACP state.

• The vessel must sail under the flag of any ACPcountry or the EU.

• The vessel must be at least 50 percent ownedby nationals of any ACP or EU state, and thechairman and the majority of the board mem-bers must be nationals of any of thosecountries.

• Under certain conditions the EU will acceptvessels chartered or leased by the ACP stateunder the Cotonou Agreement.

• Under Cotonou, 50 percent of the crew, themaster, and officers must be nationals of anyACP state or the EU.

So identifying the nationality of a fish can bea complex task.

Source: Official Journal of the EuropeanCommunities 2000.

requirements for wooden office furniture (HS940330) are

• Manufacture in which all the material used isclassified within a heading other than that of theproduct, or

• Manufacture in which the value of all the mate-rials used does not exceed 40 percent of the ex-works price of the product.

Providing alternative means of satisfying originrequirements is more liberal and will facilitate tradeunder preferential trade agreements.

With regard to the value-added requirements,the WTO concludes that on average a threshold ondomestic content of between 40 and 60 percent isthe norm, with the average import requirementbeing between 60 and 40 percent (WTO 2002a). Inthe EU agreements there are various thresholds onimport content ranging from 30 to 50 percent. InNAFTA there is a domestic content requirement ofeither 50 or 60 percent according to the methodused to value the product. A value-added require-ment of 50 percent can be very demanding in theglobalized world of today in which production hasbecome split across, often many, countries. A fur-ther feature of globalization is that in a range ofproducts such as clothing products, computers,and telecommunications equipment, much of thevalue-added lies in the intermediate products. Highvalue-added requirements, therefore, become par-ticularly difficult for developing countries to satisfybecause it is the final labor-intensive stage that theyhost. In this way restrictive rules of origin act toconstrain specialization at the country level.

In general, these percentage value rules arerarely applied as the sole test of origin and aretypically applied with the change of tariff classifi-cation. Exceptions are Australia New ZealandCloser Economic Relations Trade Agreement(ANZCERTA), South Pacific Regional Trade andEconomic Co-operation Agreement (SPARTECA),and AFTA, which have percentage requirementswithout any additional need for change of tariffheading, although all three agreements do requirethat the last process of manufacture be undertakenin the exporting country.

As noted, under the value-added method originis sensitive to changes in factors such as exchangerates, wages, and commodity prices. This meansthat the value-added method will tend to penalize

low labor cost locations, which will find it more dif-ficult to add the necessary value relative to highercost locations, and is likely to cause particularproblems of compliance for companies in develop-ing countries that lack the sophisticated accountingsystems necessary under this method.

Rules based on specific manufacturing processesare widely used (in 74 of the 83 preferential tradeagreements analyzed by the WTO [2002a], often inconjunction with change of tariff classification orthe value-added criterion or both, and are a partic-ular feature of the rules applied to the textiles andclothing sectors.

Two examples of rules of origin and their impli-cations for conferring origin follow:

• A producer imports cotton fabric (HS5208),which is then dyed, cut, and made up into cottonshirts (HS6105). The value of the importedmaterials amounts to 65 percent of the value ofthe shirts. In this case the product would be orig-inating under the change of tariff heading rule.The product would not be originating under avalue-added rule requiring an import content ofno more than 60 percent (or a domestic contentof more than 40 percent). A specific manufactur-ing process requirement, that the product bemanufactured from yarn (the production stagebefore fabric), would mean that the productwould not be originating.12

• A doll (HS9502) is made from imported plasticsand imported ready-made garments andfootwear. The value of the imported materialsamounts to 50 percent of the value of the doll. Inthis case the doll would be originating under avalue-added rule requiring an import content ofno more than 60 percent but would not be origi-nating under the change of tariff heading becausegarments and accessories for dolls are normallyclassified under the same tariff heading as dolls.

Most preferential trade agreements also specify arange of operations that are deemed to be insuffi-cient working or processing to confer origin. Typi-cally these include simple packaging operations,

Rules of Origin, Trade, and Customs 193

12. This yarn-forward rule is common in EU agreements for allclothing products. The United States typically applies an evenstricter process rule that the clothing be made from fibers,meaning that both spinning into yarn and weaving into fabric aswell as the making up into clothing are required in the exportingcountry to confer origin on the product.

such as bottling, placing in boxes, bags, and cases,and simple fixing on cards and boards; simple mix-ing of products and simple assembly of parts; andoperations to ensure the preservation of productsduring transport and storage. These requirementsact to ensure that these basic operations do notconfer origin even if the basic rule of origin, such aschange of tariff heading, has been satisfied.

Additional Features of Preferential Rules of Origin

There are several other typical features of the rulesof origin of preferential trade schemes that caninfluence whether origin is conferred on a productand hence determine the impact of the scheme ontrade flows. These are cumulation, tolerance rules,and absorption. The treatment of duty drawbackand of outward processing outside the free trade orpreferential trade partners can also be important.

Cumulation The basic rules of origin define theprocessing that has to be done in the individualbeneficiary or partner to confer origin. Cumulationis an instrument allowing producers to importmaterials from a specific country or regional groupof countries without undermining the origin of thefinal product. In effect, the imported materialsfrom the identified countries are treated as being ofdomestic origin of the country requesting preferen-tial access. There are three types of cumulation—bilateral, diagonal (or partial), and full.

The most basic form of cumulation is bilateralcumulation, which applies to materials provided byeither of two partners of a preferential trade agree-ment. In this case, originating inputs—that is,materials—that have been produced in accordancewith the relevant rules of origin, imported from thepartner, qualify as originating materials when usedin a country’s exports to that partner. For example,under the EU’s GSP scheme, the rule of origin forcotton shirts states that origin is conferred to a ben-eficiary country if the shirt is manufactured fromyarn. That is, nonoriginating yarn may be importedbut the weaving into fabric and the cutting and themaking up into a shirt must take place in the bene-ficiary. The EU’s GSP scheme allows for bilateralcumulation so that fabric that originates in theEU—that is, fabric that has been produced inaccordance with the rule of origin for fabric (in thecase of the EU scheme, it has been produced from

the stage of fibers)—can be treated as originating inthe beneficiary country. Thus, originating fabricscan be imported from the EU and used in the pro-duction of shirts, which will qualify for preferentialaccess to the EU. However, the EU is often not theleast-cost supplier of inputs, so the benefits of thistype of cumulation can be limited. If the extra costof using EU-sourced inputs rather than the lowestcost inputs from elsewhere exceeds the availablebenefit from preferential access, then cumulationwill have no effect and there will be no improve-ment in market access.

Next, there can be diagonal cumulation on aregional basis so that qualifying materials fromanywhere in the specified region can be used with-out undermining preferential access. In otherwords, parts and materials from anywhere in theregion that qualify as originating can be used in themanufacture of a final product that can then beexported with preferences to the partner countrymarket. Diagonal cumulation is widely used inEU agreements but is not applied by NAFTA. InEurope, a pan-European system of rules of originwith diagonal cumulation has been developed thatgoverns EU free trade agreements with the EFTAcountries and countries in Central and EasternEurope. Diagonal cumulation is allowed underthe EU’s GSP scheme but within a limited set ofregional groups that have pursued their ownregional trade agreements. For example, under theEU’s GSP scheme, diagonal cumulation can takeplace within four regional groupings: Associationof Southeast Asian Nations (ASEAN), CentralAmerican Common Market (CACM), the AndeanCommunity, and South Asian Association forRegional Cooperation (SAARC). Diagonal cumula-tion allows originating materials from regionalpartners to be further processed in another countryin the group and treated as if the materials wereoriginating in the country where the processing isundertaken.13 However, this flexibility in sourcingis constrained by the further requirement that thevalue added in the final stage of production exceed

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13. For both bilateral and regional cumulation there can be anadditional requirement that the processing carried out be morethan “insufficient working or processing.” This is typical in EUagreements but not those of other countries, and requires thatmore than packing, mixing, cleaning, preserving, and simpleassembly of parts take place.

the highest customs value of any of the inputs usedfrom countries in the regional grouping. Thus, forexample, with diagonal cumulation shirt producersin Cambodia can use fabrics from Indonesia (pro-viding they are originating, that is, produced fromthe stage of fibers) and still receive duty-free accessto the EU, but the value-added in Cambodia mustexceed the value of the imported fabric fromIndonesia. Similarly, producers in Nepal canimport originating fabric from India and still qual-ify for preferential access to the EU if the valueadded in Nepal is sufficient.

However, UNCTAD and The CommonwealthSecretariat (2001) show how the value-addedrequirement mentioned above can render regionalcumulation of little value. For example, value-added in the making up of clothing in Bangladeshranges from 25 to 35 percent of the value of theproduct so that the import content of the fabricfrom India is around 65 to 75 percent. In this casethe value-added requirement placed on regionalcumulation is not met and origin of the made-upclothing is not conferred on Bangladesh but onIndia. Regional cumulation still allows clothingproduced in Bangladesh from Indian fabrics prefer-ential access to the EU but not at the zero rate (forwhich Bangladesh is eligible) but at the rate forwhich India is eligible, which is a 20 percent reduc-tion from the MFN rate. Thus, instead of the zeroduty, which is in principle available to Bangladeshunder the Everything but Arms (EBA) initiative, atariff of over 9 percent would be levied on theseexports from Bangladesh to the EU.

Finally, there can be full cumulation whereby anyprocessing activities carried out in any participat-ing country in a regional group can be counted asqualifying content regardless of whether the pro-cessing is sufficient to confer originating status tothe materials themselves. In certain GSP schemes,cumulation is permitted across all developingcountry beneficiaries. Full cumulation allows formore fragmentation of production processesamong the members of the regional group and sostimulates increased economic linkages and tradewithin the region. Under full cumulation it may beeasier for more developed, higher labor cost coun-tries to outsource labor intensive low-tech produc-tion stages to less developed, lower wage partnerswhile maintaining the preferential status of thegoods produced in low-cost locations. Diagonal

cumulation, by requiring more stages of produc-tion or higher value-added to be undertaken in thelower cost country, may make it more difficult forthe products produced by outsourcing to qualifyfor preferential access. However, the documentaryrequirements of full cumulation can be more oner-ous than those required under diagonal cumula-tion. Detailed information from suppliers of inputsmay be required under full cumulation while thecertificates of origin, which accompany importedmaterials, may suffice to show conformity underdiagonal cumulation. For this reason it is desirablethat traders be offered the opportunity to use eitherdiagonal or full cumulation.

Under full cumulation, all the processing carriedout in participating countries is assessed in decid-ing whether there has been substantial transforma-tion. Hence, full cumulation provides for deeperintegration among participating countries. Fullcumulation is rare and is currently applied in theEU agreements with the EFTA countries; in the EUagreements with Algeria, Morocco, and Tunisia;and under the Cotonou Agreements between theEU and the ACP countries. It is also available in theGSP schemes of Japan and the United States;among countries within specified groupings; andon a global basis among all developing countrybeneficiaries in the schemes of Australia, Canada,and New Zealand; as well as in ANZCERTA andSPARTECA.

For example, a clothing product made in onecountry from fabric produced in a regional partner,which in turn was made from nonoriginating yarn,would be eligible for duty-free access to the EUunder full cumulation but not under diagonalcumulation because the fabric would not bedeemed originating (the rule of origin for the fabricrequires manufacture from fibers).

A second example follows: Country A providesparts (say chassis for bicycles) to country B, whichare then processed (painted and prepared) and sentto country C for final assembly using other locallyproduced parts (tires and seat) before beingexported to country D. Countries B, C, and D par-ticipate in the same FTA; country A is not a mem-ber. The value of the final product (bicycle)exported from country C to country D comprises25 percent of parts from country A, 25 percent ofvalue-added in country B, and 50 percent of partsand value-added in country C. The value of parts

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from country A comprises 50 percent of the valueof the intermediate product exported from countryB to country C. If there were a 40 percent maxi-mum import content for all products, the bicycleexported from country C to D would qualify forpreferential access under full cumulation (only the25 percent of parts from country A is nonoriginat-ing). However, it would not qualify under diagonalcumulation (the value of nonoriginating materialsin the product exported by country B exceeds 40percent). This intermediate product would not betreated as originating, and the total of nonoriginat-ing materials in the final product is now calculatedas 50 percent of the final price of the bicycle (thevalue from both countries A and B).

Tolerance or De Minimis Tolerance or de min-imis rules allow a certain percentage of nonorigi-nating materials to be used without affecting theorigin of the final product. Thus, the tolerance rulecan act to make it easier for products with nonorig-inating inputs to qualify for preferences under thechange of tariff heading and specific manufactur-ing process rules. This provision does not affect thevalue-added rules. The tolerance rule does not actto lower the limitation on the value of importedmaterials. The nonoriginating materials will alwaysbe counted in import value content calculations.

Under NAFTA, nonoriginating materials can beused even if the rule on sufficient processing is notfulfilled, provided their value does not exceed7 percent of the value of the final product. Underthe EU’s GSP scheme, the threshold is 10 percent,but under the Cotonou Agreement between the EUand the ACP countries the tolerance rule allows15 percent of nonoriginating materials that wouldotherwise not be accepted to be used. For example,in the case of the doll given above in which the useof dolls clothing accessories denied origin to thefinal product under the change of heading rule(because the accessories are classified under thesame heading), origin would have been conferredunder the EU GSP if the value of the dolls’ clothingand accessories was less than 10 percent of the valueof the doll.

Thus, the tolerance rule can act to make it easierfor products with nonoriginating inputs to qualifyfor preferences under the change of tariff headingand specific manufacturing process rules. However,the tolerance rules applied to the textiles and cloth-

ing sector were often different and generally lessfavorable than the general rules on tolerance. Inmany cases the rule is applied in terms of the maxi-mum weight rather than value of nonoriginatingmaterials that are tolerated, and in cases where thevalue threshold is maintained it is set at a lowerlevel than in the general rule.

Absorption (or Roll-Up) Principle The absorp-tion principle provides that parts or materials thathave acquired originating status by satisfying the rel-evant rules of origin for that product can be treatedas being of domestic origin in any further processingand transformation. This is of particular relevance tothe value-added test. For example, in the productionof a particular part, origin is conferred becauseimported materials constitute 20 percent of the finalprice of the part and are less than the maximum 30percent import content rule of origin. This part willthen be treated as 100 percent originating whenincorporated into a final product. The 20 percentimport content of the part is not taken into accountwhen assessing the import content of the final prod-uct. The converse of this is that if the part does notsatisfy the relevant rule of origin, it is deemed to be100 percent nonoriginating (so-called “roll-down”).Ideally, if the part or materials do not satisfy the rele-vant rule of origin, the portion of value addeddomestically should still be counted in the determi-nation of the origin of the final product.

Duty Drawback Provisions relating to duty draw-back can lead to the repayment of duties on non-originating inputs used in the production of a finalproduct exported to a free trade or preferentialtrade partner. Some agreements contain explicitno-drawback rules that will affect decisions relatingto the sourcing of inputs by firms exporting withinthe trade area and will switch the previous incen-tives for the use of imported inputs from nonpar-ticipating countries toward the use of originatinginputs from participating ones. Increasingly impor-tant are rules concerning territoriality and the treat-ment of outward processing by companies locatedwithin the free trade area to locations outside it.These rules determine whether processing outsidethe area undermines the originating status of thefinal product exported from one partner toanother.

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Rules of Origin, Trade, and Customs 197

BOX 9.2 More Restrictive Rules of Origin: The Case of ClothingUnder NAFTA Rules

The following example is for men’s or boys’overcoats made of wool (HS620111).

“A change to subheading 620111 from anyother chapter, except from heading 5106through 5113, 5204 through 5212, 5307through 5308 or 5310 through 5311, Chapter 54or heading 5508 through 5516, 5801 through5802 or 6001 through 6006, provided that:

The good is both cut and sewn or otherwiseassembled in the territory of one or more of theParties.”

The basic rule of origin stipulates change ofchapter but then provides a list of headings andchapters from which inputs cannot be used.Thus, in effect the overcoat must be manufac-tured from the stage of wool fibers forward,because neither imported woolen yarn(HS5106–5110) nor imported woolen fabric(HS5111–5113) can be used. However, the rulealso states that imported cotton thread(HS5204) and imported thread of man-madefibers (HS54) cannot be used to sew the coattogether. This rule in itself is restrictive; however,the rule for this product is further complicatedby requirements relating to the visible lining:

“Except for fabrics classified in 54082210,54082311, 54082321, and 54082410, the fab-rics identified in the following sub-headings andheadings, when used as visible lining material incertain men’s and women’s suits, suit-type jack-ets, skirts, overcoats, car coats, anoraks, wind-breakers, and similar articles, must be formedfrom yarn and finished in the territory of a party:5111 through 5112, 520831 through 520859,520931 through 520959, 521031 through521059, 521131 through 521159, 521213through 521215, 521223 through 521225,540742 through 540744, 540752 through540754, 540761, 540772 through 540774,

540782 through 540784, 540792 through540794, 540822 through 540824 (excludingtariff item 540822aa, 540823aa or 540824aa),540832 through 540834, 551219, 551229,551299, 551321 through 551349, 551421through 551599, 551612 through 551614,551622 through 551624, 551632 through551634, 551642 through 551644, 551692through 551694, 600110, 600192, 600531through 600544 or 600610 through 600644.”

This stipulates that the visible lining usedmust be produced from yarn and finished ineither party. This rule may well have been intro-duced to constrain the impact of the tolerancerule that would normally allow 7 percent of theweight of the article to be of nonoriginatingmaterials. In overcoats and suits the lining isprobably less than 7 percent of the total weight.

Finally, it is interesting to note that the rulesof origin also provide a number of very specificexemptions to the rules of origin for materialsthat are in short supply or not produced in theUnited States, reflecting firm-specific lobbyingto overcome the restrictiveness of these rules oforigin when the original NAFTA rules of originwere defined. The most specific example iswhere apparel is deemed to be originating ifassembled from imported inputs of

“Fabrics of subheading 511111 or 511119, ifhand-woven, with a loom width of less than 76cm, woven in the United Kingdom in accor-dance with the rules and regulations of the Har-ris Tweed Association, Ltd., and so certified bythe Association;. . .”

So, the job of business and of the relevantofficials to check consistency with such rules areclearly not simple ones.

Source: U.S. International Trade Commission2004.

Rules of Origin in Existing FreeTrade and Preferential TradeAgreements

Table 9.B.1 in annex 9.B provides a simplified lookat the key features of the rules of origin applied in anumber of regional and bilateral trade schemes.The table contrasts the nature of the rules appliedas well as the use of cumulation mechanisms, toler-ance rules, and absorption.

Table 9.B.1 shows that all three methods of deter-mining origin are employed in agreements involving

the EU and NAFTA. A key feature of the EU andNAFTA models of rules of origin is that the rules arespecified at a detailed level on a product-by-productbasis. The recent Japan–Singapore agreement alsofollows this approach. The U.S.–Singapore FTA hasrules of origin that are similar to those of NAFTA,which means that product-specific and sometimescomplex rules are used. The annexes specifying theserules of origin can be massive. In the U.S.–Singaporeagreement there are over 240 pages of product-specific rules of origin. Box 9.2 provides a further

example of complex and restrictive rules from theNAFTA rules of origin for clothing products.

This detailed product-specific approach to rulesof origin of the EU and NAFTA can be contrastedwith most of the agreements involving developingcountries, such as AFTA, Common Market for East-ern and Southern Africa (COMESA), and MercadoComun del Sur (MERCOSUR), where general rulesare typically specified and there are no, or very few,product-specific rules of origin. This suggests thatdomestic industry did not play a significant role inthe specification of these rules. Some agreements,such as AFTA, rely solely on the value-added method.The COMESA rules of origin require satisfaction of avalue criterion (either the CIF value of imports mustnot exceed 60 percent of the value of all materialsused, or domestic value-added should be at least 35percent of the ex-factory cost of the goods)14 or achange of tariff heading.15

What are the merits of these different ap-proaches to the specification of preferential rules oforigin? Specifying detailed product-by-productrules can lead to precise rules that leave littlescope for interpretation. Indeed, some argue that aproduct-by-product approach based upon inputfrom domestic producers is the best way to dealwith the specification of rules of origin. However, asthe examples in this chapter show, product-specificrules can become complex and restrictive, reflectingthat a product-by-product approach offers oppor-tunities for sectoral interests to influence the speci-fication of rules of origin in a way that is notdirectly related to their function of identifying thenationality of products and of preventing tradedeflection. The more complex and the more techni-cal the rules become, the greater the scope for theparticipation of domestic industries in settingrestrictive rules of origin (Hoekman 1993). Indeed“the formulation of product-specific rules of originis, by its nature, very much out of the practicalcontrol of generalists, which is to say governmentofficials at the policy level, and very much in thepractical control of specialists, which is to say the

representatives of concerned industries” (Palmeter1997, p. 353). Other interests, such as consumers ofthe relevant product, are effectively excluded fromdiscussion concerning the rules of origin. Thosewho lobby hardest for trade policy interventions arenot altruistic and their objectives with regard torules of origin are likely to be to restrict competi-tion from imports and to expand their own exportswithin a free trade area at the expense of third-country suppliers. Such objectives can be moreeffectively pursued when policy is determined in anenvironment that lacks transparency and openness,as can easily occur when rules of origin are deter-mined in a product-by-product manner.

From a trade policy perspective, the restrictive-ness of a value-added rule, in terms of its impact ontrade, is clearer and more apparent than the changeof tariff classification and specific manufacturingprocess rules. It is relatively straightforward tocompare alternative proposals concerning a value-added rule. The extent of protection engendered bycomplex and technical rules of origin that differacross products is much more difficult to detect.This asymmetry of information is one reason thosegroups seeking protection will push for complexrules of origin and why the change of tariff classifi-cation and specific manufacturing process rulesmay be more susceptible to capture by protectionistdomestic interest groups (Hirsch 2002).

Thus, it is apparent that adopting a product-by-product approach to rules of origin will tend to leadto rules that are more restrictive than is necessary toprevent trade deflection—that is, protectionist rulesof origin—and can lead to an overly complex sys-tem that is difficult to implement by traders andadds considerably to the burden of customs.

However, it appears that more general rules oforigin can lead to greater scope for interpretation,as noted by Izam (2003), for example, with regardto the rules of origin in the Latin American Integra-tion Association. In Asia there are some suggestionsof underutilization of AFTA preferences reflectinguncertainties concerning the rules of origin. Itappears that the rules of origin may be subject todifferent interpretations in different ASEAN coun-tries leading to inconsistent application of the rulesthroughout the region.16 Nevertheless, this suggests

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14. The COMESA agreement also specifies that a range of goodsdeemed to be of particular importance to economic develop-ment need only satisfy a 25 percent domestic value-addedcriterion.

15. At the present time, however, the change of tariff headingprovision is not being implemented. 16. Pricewaterhouse Coopers (2002).

the need for more effective coordination betweencustoms and other relevant authorities in differentpartners to clarify existing rules and regulationsrather than formulating more restrictive rules oforigin. It is also important that alternative rules beconsidered so that producers are allowed some flex-ibility in proving origin. Hence, providing produc-ers with the option of satisfying either a value-added rule or a change of tariff classification rule islikely to be trade facilitating.

In table 9.B.1 the column showing the use ofthe value-added methods highlights the variation inthe permitted amount of nonoriginating importcontent across the different agreements. In theCanada–Chile agreement, for example, products aretypically subject to a change of tariff classification(the level of change required varies by product) anda domestic value-added requirement that variesbetween 25 and 60 percent (according to the prod-uct and the method of valuation used). In theU.S.–Chile agreement, where the rules are similar tothose of NAFTA but not identical for all products,the required domestic content is between 35 and55 percent. Under the Canada–Chile agreement, forexample, plastic products (HS39) must satisfyrequirements of change of tariff heading andbetween 50 percent and 60 percent of domesticvalue-added (depending on the method of valua-tion). Under the U.S.–Chile agreement most plasticproducts need only satisfy the requirement ofchange of subheading to be originating. To be origi-nating under the U.S.–Chile agreement nonelectri-cal engineering products (HS84) must satisfy achange of subheading and a domestic value contentof between 35 and 45 percent (according to methodof valuation), while under the Canada–Chile agree-ment such products need satisfy change of subhead-ing but only a 25 to 35 percent content requirement(depending on valuation method). Thus, certainproducts produced in Chile that are granted duty-free access to Canada may not receive such treat-ment in the United States due to the more liberalrules of origin applied in the Canada–Chile agree-ment for those products, while other products maysatisfy U.S. rules of origin requirements but notthose of Canada.

Table 9.B.1 also shows that all the agreementscontain provisions regarding cumulation but alsothat there is considerable variation in the nature ofcumulation. For example, the EU allows for diago-

nal cumulation in the Pan-European Area of Cumu-lation encompassing EFTA, Central and EasternEuropean and Balkan countries, while there is fullcumulation among the African and Caribbeancountries under the Cotonou Agreement. Similarly,for tolerance rules, which are widely applied inagreements that are not based on the sole use of thevalue-added method, there are considerable differ-ences across agreements—even those involving thesame country. Under the EU–Mexico Free TradeAgreement, nonoriginating materials of up to 10percent of the value of the final product can be used,while under the agreement between the EU andSouth Africa the level of tolerance is set at 15 per-cent. Different rules of tolerance are often estab-lished for certain sectors, especially textiles andclothing.17 Table 9.B.1 also shows the widespreaduse of the absorption principle.

Thus, this simple and brief look at the nature ofthe rules of origin applied in a number of existingfree and preferential trade agreements highlightsthat the methods of defining origin and provisionsrelating to cumulation, tolerance, and absorptionare widely applied. However, there is little com-monality across agreements in the precise nature ofthe rules that are adopted. In general, recent agree-ments involving the EU and the United States arebased upon detailed, often complex, product-specific rules of origin. The restrictiveness of theserules would appear to vary across sectors. Forexample, the rules for clothing products requiringproduction from yarn can be particularly difficultto satisfy for small less-developed economies. Assuch, the impact of these agreements will not beuniform across sectors.

The Economic Implications of Rulesof Origin

The specification and implementation of rules oforigin can be a major determinant of the impact offree trade and preferential trade agreements. Inpractice, rules of origin are controversial becausethe available evidence, discussed in the next

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17. Nevertheless, the tolerance rule may be important because inNAFTA there are chapter-specific rules for clothing productsrelating to the originating status of “visible linings” that appearto be motivated to limit the impact of the tolerance rule. Seebox 9.2 for details.

section, suggests that the use of preferences tends tobe substantially less than full. That is, a substantialproportion of actual exports that are eligible forpreferences do not enter the partner’s market withzero or reduced duties but actually pay the MFNtariff.

Compliance with rules of origin can affect thesourcing and investment decisions of companies.18

If the optimal input mix for a firm involves the useof imported inputs that are proscribed by the rulesof origin of a free trade agreement in which thecountry participates, the rules of origin will reducethe value of the available preferences. The firm willhave to shift from the lowest to a higher cost sourceof inputs in the domestic economy that will reducethe benefits of exporting under a lower tariff. Inthe extreme, if the cost difference exceeds the sizeof the tariff preference, the firm will prefer tosource internationally and to pay the MFN tariff.The ability to cumulate inputs from a partnerunder bilateral, diagonal, or full cumulation willtend, in increasing order, to open the possibilitiesfor identifying low cost sources of inputs that donot compromise the qualifying nature of the finalproduct. Nevertheless, if the lowest cost supplier isnot a member of the area of cumulation, the bene-fits of the preferential scheme will always be lessthan indicated by the size of the preferential tariff.

Rules of origin can also distort the relativeprospects of similar firms within a country. Forexample, a clothing producer in, say, Moldova mayhave established an efficient manufacturing processon the basis of importing fabrics from Turkey. Aless efficient producer who uses imported EU fab-rics may be able to expand production on the basisof preferential access to the EU market under theGSP (with bilateral cumulation). The more effi-cient firm may not be able to expand because itsproduct does not qualify for preferences due to the

use of nonqualifying fabrics, and there may be sub-stantial costs in changing suppliers of fabrics.

These problems will be exacerbated in sectorswhere economies of scale are important. A pro-ducer that supplies both preferential and nonpref-erential trade partners, or faces different rules oforigin in different preferential partners, will have toproduce with a different input mix for differentmarkets if the producer is to receive preferentialaccess. This may undermine the benefits fromlower average costs that would arise if total produc-tion were to be based on a single set of materialinputs and a single production process.

Rules of origin may be an important factordetermining the investment decisions of multi-national firms. Such firms often rely on importedinputs from broad international networks that arevital to support the firm-specific advantages theypossess, such as a technological advantage in theproduction of certain inputs. More generally, if thenature and application of a given set of rules of ori-gin increases a degree of uncertainty concerningthe extent to which preferential access will actuallybe provided, the level of investment will be lessthan if such uncertainty were reduced.

Rules of Origin and the Utilizationof Trade Preferences

Difficulties that may arise in satisfying the rules oforigin and the costs of proving conformity withthose rules are suggested by the relatively low uti-lization rates that are observed in preferential tradeschemes.19 Sapir (1998) showed that 79 percent ofEU dutiable imports from GSP beneficiaries in 1994qualified for preferential access to the EU market,yet only 38 percent actually entered the EU marketwith a duty less than the MFN rate. The reasons forthis difference were the effects of rules of origin andtariff quotas for particular products, which set lim-its on the amount of imports that can receive bene-ficial access to the EU market. It also reflects thetreatment of textiles and clothing products, whichaccounted for over 70 percent of EU imports from

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18. Economists have generally given little attention to rules oforigin within the voluminous literature on free trade areas. Thekey initial contributions on rules of origin are Krueger (1997)and Krishna and Krueger (1995), who demonstrate how rules oforigin can act as “hidden protectionism” and induce a switch indemand in free trade partners from low-cost external inputs tohigher-cost partner inputs to ensure that final products actuallyreceive duty-free access. Falvey and Reed (1998) show how rulesof origin can be used to protect a domestic industry fromunwanted competition based from a partner, even in conditionswhere trade deflection is unlikely.

19. For many years UNCTAD has been highlighting the rela-tively low levels of utilization of preferences granted by devel-oped countries to developing countries. For a recent discussionof utilization rates of GSP schemes and rules of origin, seeInama (2002).

countries covered by the GSP but where the utiliza-tion rate (the ratio of imports receiving preferencesto eligible imports) was only 31 percent. In 2001 theutilization rate for least developed countries (LDCs)stood at 47 percent. It is important to stress that theutilization rate of preferences measures the propor-tion of exports to the EU that are recorded at theborder as requesting preferences, so the low level ofutilization cannot reflect the inability of the recipi-ents to meet other requirements to access the EUmarket, such as health and safety or sanitaryrequirements or deficiencies in their infrastructure,as is sometimes suggested. Lack of infrastructuremight explain why there is a very muted responsefrom trade to preferences but cannot explain why atthe border some products that are eligible for pref-erences do not request them.

It is worth noting here that the coverage rate ofthe EU scheme is comprehensive; over 99 percentof imports from developing countries of productsthat are subject to duties in the EU are eligible forpreferences. The striking feature of the EU schemeis the low utilization of these preferences. The U.S.GSP scheme in contrast has a much higher utiliza-tion rate (over 76 percent in 1998 and as high as96 percent for LDCs in 2001), but is much lesscomprehensive in terms of coverage (only abouthalf of dutiable imports from developing coun-tries are eligible for preferences). This is becausetextiles and clothing products are essentiallyexcluded from the U.S. GSP scheme. They areincluded in the EU scheme, but only a small pro-portion of imports covered actually receive anypreferences. However, an important feature of theU.S. scheme is that there are preferences on mineralfuels for LDCs, whereas in the EU there are zeroduties on imports of oil. UNCTAD reports thatwhen mineral products are excluded, the utilizationrate for LDCs falls below 50 percent. Also impor-tant is that under the U.S. scheme the preferencesare 100 percent, that is, products granted preferen-tial access pay no duty. Under the EU GSP schemethere is a range of “sensitive products” for whichpreferences for nonLDCs are partial. Under thecurrent scheme there is a reduction of 3.5 percent-age points, although for textiles and clothing thereduction is only 20 percent of the MFN rate.Hence, the low utilization rate of the EU may reflectthat the costs of satisfying the origin rules, or ofproving conformity with them, or both, exceed the

margin of preferences. In 2001 around 70 percentof exports to Canada from the LDCs that were eli-gible for preferences actually benefited from prefer-ential access.20

Under the EU’s EBA Agreement for the LDCs,which offers duty-free access for all products,almost all of Cambodia’s exports to the EU are eli-gible for zero duty preferences, yet in 2001 only36 percent of those exports obtained duty-freeaccess. Brenton (2003) shows that this lack of use ofpreferences meant that on average Cambodia’sexports to the EU paid a tariff equivalent to 7.7 per-cent of the value of total exports. Again, the mainsuspect for this underutilization of trade prefer-ences is the rules of origin, particularly becauseCambodia specializes in the production of clothingproducts for which EU rules of origin are veryrestrictive, requiring production from yarn.

Brenton and Manchin (2003) show that a largeamount of EU imports of clothing products fromEastern European countries made from EU-produced fabrics still enter the EU market under analternative customs regime—outward processing—even though there is no fiscal incentive to do sobecause EU tariffs have been removed under freetrade agreements. This probably reflects the costsand uncertainties in proving origin that would benecessary under the normal preferential customsprocedures.

In recent developments the United States hasintroduced the African Growth and OpportunityAct (AGOA), extending the number of productseligible for duty-free access to the United Statesunder the GSP. These products include clothing.However, AGOA eligibility does not automati-cally imply that those countries are entitled to theprovisions on clothing. Countries must firstbe approved based upon the implementation ofwhat are deemed to be effective enforcementmechanisms. Under the GSP there is a standardvalue-added requirement of 35 percent with cumu-lation permitted between (certain) members ofregional groups, including the Andean Commu-nity, ASEAN, Southern African DevelopmentCommunity (SADC), Caribbean Community(CARICOM), and the West African MonetaryUnion. AGOA extends the GSP rules by allowing

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20. The data in this paragraph come from UNCTAD and theCommonwealth Secretariat 2001 and UNCTAD 2003.

for full cumulation between any Sub-Saharancountries and also for bilateral cumulation with theUnited States, with inputs from the latter limited to15 percent of the value-added. However, the rulesof origin for clothing are different (textile productsremain effectively excluded from preferences).

The rules of origin for clothing stipulate themaking up or assembly in one or more beneficiarycountries but require the use of fabrics made andcut in the United States from yarns and threadformed in the United States. Fabrics made in bene-ficiary countries from yarns formed in those coun-tries or the United States can be used, provided thatimports of the finished products into the UnitedStates do not exceed a current limit of 4.2 percentof total United States imports of clothing, rising to7 percent over the period to 2008.21 Finally, there isa special provision that allows the use of fabricfrom any country, again subject to approval, quan-titative limits, and initially for only least developedSub-Saharan African countries but now granted tocertain higher income countries such as Namibiaand Kenya. However, this provision is only availableuntil the end of September 2007. This provisionprovides for liberal rules of origin.

Mattoo, Roy, and Subramanian (2002) showhow the basic AGOA rules of origin for clothingseverely constrain the benefits of AGOA and thatthe general use of more liberal rules couldincrease the gains to beneficiary countries by asmuch as a factor of five. Further, recent trends inU.S. imports from AGOA beneficiaries stronglysuggest that restrictive rules of origin can severelyconstrain trade. Between 1999 and 2002, U.S.imports of clothing from those countries thathave been able to source fabrics from any countryincreased by 92 percent. U.S. imports of clothingfrom those countries that have been eligible forthe preferences for clothing but have faced themore restrictive rules of origin (essentially Mauri-tius and South Africa) have increased by only23 percent.

Systematic empirical analysis linking restrictiverules of origin directly to trade outcomes iscurrently limited. Estevadeordal and Miller (2002)show how in the transition from the U.S.–CanadaFTA to NAFTA, rules of origin for certain sectors,

such as textiles, became more restrictive and thatas a result the use of the available preferencesdeclined. Estevadeordal and Suominen (2004)introduce a synthetic measure of the restrictive-ness of rules of origin into a standard gravitymodel of bilateral trade flows. Their econometricanalysis leads them to conclude that restrictiveproduct-specific rules of origin undermine overalltrade between partners and that provisions such ascumulation and de minimis rules, which act toincrease the flexibility of application of a given setof processing requirements, serve to boost intra-regional trade. Applying this approach at the sec-toral level finds support for the hypothesis that therestrictiveness of rules of origin for final goodsstimulates trade in intermediate products betweenpreferential partners. Cadot and others (2002),using a similar measure of the restrictiveness ofNAFTA rules of origin, find that for sectors wheretariff cuts are larger than average, the rules of ori-gin are more restrictive and the utilization rate ofpreferences by Mexican exporters lower than aver-age. They conclude that rules of origin are theprime culprit for the very modest impact ofNAFTA on Mexican exports identified by otherresearchers.

Rules of Origin and EconomicDevelopment

Can and should rules of origin be used as tools tostimulate economic development within a regionalgrouping? The Draft Ministerial Text for theCancún meeting of the WTO members as part ofthe Doha Development Round of trade negotia-tions proposes, under provisions for special anddifferential treatment, that “developing and least-developed country Members shall have the right toadopt preferential rules of origin designed toachieve trade policy objectives relating to theirrapid economic development, particularly throughgenerating regional trade.” Strict rules of origin areviewed by some as a mechanism for encouragingthe development of integrated production struc-tures within developing countries to maximize theimpact on employment and to ensure that not justlow value-added activities are undertaken in thedeveloping countries.

There are problems with this view. First, suchrules discriminate against small countries where

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21. It does not appear as if this quota is, or is likely to be,binding.

the possibilities for local sourcing are limited ornonexistent. Because most developing countriesare small countries, they are particularly disad-vantaged by restrictive rules of origin relative tolarger countries. Second, there is no evidence thatstrict rules of origin over the past 30 years havedone anything to stimulate the development ofintegrated production structures in developingcountries. In fact, such arguments have becomeredundant in light of technological changes andglobal trade liberalization that have led to thefragmentation of production processes and thedevelopment of global networks of sourcing.Globalization and the splitting up of the produc-tion chain does not allow the luxury of being ableto establish integrated production structureswithin countries. Strict rules of origin act to con-strain the ability of firms to integrate into theseglobal and regional production networks and ineffect act to dampen the location of any value-added activities. In the modern world, flexibilityin the sourcing of inputs is a key element in inter-national competitiveness. Thus, it is quite feasiblethat restrictive rules of origin, rather than stimu-lating economic development, will raise costs ofproduction by constraining access to cheap inputsand undermine the ability of local firms to com-pete in overseas markets.

Flatters (2002) and Flatters and Kirk (2003) doc-ument the evolution of the rules of origin in SADC,and highlight these points. They show that theadoption of restrictive rules of origin is more likelyto constrain than to stimulate regional economicdevelopment. This example provides a salutary les-son of how sectoral interests and misperceptions ofthe role and impact of rules of origin can act toundermine regional trade agreements.

SADC initially agreed to simple, general, andconsistent rules of origin similar to those ofneighboring and overlapping COMESA. The ini-tial rules required a change of tariff heading, aminimum of 35 percent of value-added within theregion, or a maximum import content of 60 per-cent of the value of total inputs. Simple packagingand so forth were defined to be insufficient toconfer origin. However, these rules were subse-quently revised and are now characterized bymore restrictive sector- and product-specific ruleswith the change of tariff heading requirementbeing supplanted by detailed technical process

requirements and with much higher domesticvalue-added and lower permitted import con-tents. The rules became much more similar tothose of the EU and of NAFTA, reflecting in partthe influence of the recently negotiated EU–SouthAfrica agreement and the rules of origin govern-ing EU preferences to ACP countries: “TheEU–South Africa rules were often invoked by spe-cial interests in South Africa as models for SADC.Such claims were too often accepted at face valueand not recognized as self-interested pleading forprotection by already heavily protected domesticproducers. There were few questions about theappropriateness of the underlying economicmodel (whatever it might be) for SADC” (Flattersand Kirk 2003, p. 7).

Flatters (2002) also points out that in the SADCcase it has also been argued that customs adminis-trations in the region are weak and this makes itlikely that low-cost products from Asia could enterthrough porous borders and then claim tariff pref-erences when exported to another member state. Itis then suggested that restrictive rules of origin arerequired to prevent this from happening. However,there is no reason to expect that weak customsadministrations should be better able to enforcestrict rules of origin than less restrictive rules. Infact, in many cases the rules of origin become sostrict that no producers in the region can satisfythem so that no discretion from customs isrequired—preferences are not granted. This, ofcourse, means that the preferential trade agreementhas no impact. A better approach is to adopt eco-nomically sensible rules of origin and a program toimprove administrative capacities in customs.Clearly designed safeguard measures can also beadopted to deal with surges of imports entering viapartner countries.

To conclude, rules of origin are an inefficienttool in achieving development objectives. Betterpolicies are available. Rules of origin should beused as a mechanism for preventing trade deflec-tion. Restrictive rules of origin that go beyond thisfunction and that seek to force use of local contentare more likely to be counterproductive by under-mining the competitiveness of downstream indus-tries (Flatters 2001). If the objective is to stimulateregional trade, this is best achieved by adoptingsimple, clear, consistent, and predictable rules oforigin that avoid administrative discretion and

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onerous burdens on customs and that minimize thecosts to businesses in complying with them.

Customs and the Costs ofAdministering PreferentialRules of Origin

Customs is typically responsible for implementingthe system of rules of origin. Customs usually hasthe responsibility to check the certificate of origin;customs can also be involved in the issuing oforigin certificates for local exporters. Rules of ori-gin, while an essential element of free trade agree-ments, add considerable complexity to the tradingsystem for traders, customs officials, and trade pol-icy officials. For companies there is not only theissue of complying with the rules on sufficient pro-cessing but also the cost of obtaining the certificateof origin, including any delays that arise in obtain-ing the certificate. The costs of proving origininvolve satisfying a number of administrative pro-cedures to provide the documentation that isrequired and the costs of maintaining systems thataccurately account for imported inputs from dif-ferent sources to prove consistency with the rules.The ability to prove origin may well require the useof, what are for small companies in developing andtransition economies, sophisticated and expensiveaccounting procedures. Without such proceduresit is difficult for companies to show precisely thegeographical breakdown of the inputs they haveused.

There is limited information on these costs butthe available studies suggest that the costs of pro-viding the appropriate documentation to prove ori-gin can be around 2 to 3 percent or more of thevalue of the export shipment for companies indeveloped countries.22 The costs of proving originmay be even higher, and possibly prohibitive, incountries where customs mechanisms are poorlydeveloped. Thus, even if producers can satisfy therules of origin by meeting the technical require-ments, they may not request preferential accessbecause the costs of proving origin are high relativeto the duty reduction that is available.

The costs of complying with the certificationrequirements of rules of origin will tend to varyacross different agreements depending upon theprecise requirements that are specified. With regardto issuing and inspecting the preferential certificateof origin, EU agreements, MERCOSUR, AFTA, andJapan–Singapore all mandate that certificates mustbe verified and endorsed by a recognized officialbody, such as customs or the Ministry of Trade. Incertain cases private entities can be involved pro-vided they are approved and monitored by the gov-ernment. In contrast, agreements involving theUnited States provide for self-certification by theexporter. The authorities of the exporting countryare not involved and are not responsible for theaccuracy of the information provided in the certifi-cates. In principal this should reduce the adminis-trative burden of complying with the rules of ori-gin. Further, under NAFTA a certificate of originis valid for multiple shipments of identical goodswithin a one-year period, while in most otheragreements a separate certificate of origin is re-quired for each shipment. EU agreements, however,do allow for exporters whom the authoritiesapprove and who make regular shipments to makean invoice declaration of origin.

Under NAFTA, both the importer and exporterare required to keep relevant records. Both exporterand importer must keep the certificate of originand the supporting documentation for five years. Ifcustoms wishes to make inquiries concerning aparticular shipment or shipments under NAFTA,they are directed to the exporter of the product. Incases where the exporter cannot substantiate aclaim for preferential access, the importer becomesliable for the duty. In cases in which fraud is sus-pected, liability extends to both exporters andimporters, whereas prior to NAFTA importers boreall financial and legal liability for compliance withcustoms rules. Under EU agreements it is theimporter who is legally liable for any penalties fortax evasion should it be subsequently found that aproduct was not eligible for preferential access.23

Under the EU’s GSP, the EU also holds the govern-ment of the exporting country responsible for

204 Customs Modernization Handbook

22. See Cadot and others (2002) and Herin (1986). The Herinstudy also found that the costs for EFTA producers of provingorigin led to one-quarter of EFTA exports to the EU paying theapplied MFN duties.

23. Because it is the importer who bears the risk regarding theaccuracy of the certificate of origin, the preferential tariff maynot be claimed. A recent study suggests that this is an importantconcern of EU importers (Cerrex 2002).

administrative cooperation, with suspension andremoval of GSP preferences the ultimate sanctionfor inadequate cooperation. The EU insists thatgovernment bodies issue the certificates of originbecause it “considers that a certificate of origin is ablank check, which will be drawn on the ECbudget” (European Commission 2003).

An important feature of most preferential tradeschemes is the requirement of direct consignmentor direct transport. This stipulates that goods forwhich preferences are requested must be shippeddirectly to the destination market and that if theyare in transit through another country, documen-tary evidence may be requested to show that thegoods remained under the supervision of the cus-toms authorities of the country of transit, did notenter the domestic market there, and did notundergo operations other than unloading andreloading. In practice it may be very difficult toobtain the necessary documentation from foreigncustoms.

To understand better the implications for cus-toms of rules of origin, especially preferential rulesof origin, the WCO and the World Bank recentlyinstituted a postal survey of customs agencies.Questionnaires were sent to all 161 members of theWCO, with 63 completed questionnaires beingreturned, a response rate of 39 percent. The major-ity of responses (43) came from developing coun-tries. Responses were received from countries of allcontinents. The questionnaire sought informationon the role of customs in issuing and checking cer-tificates of origin and requested the views of cus-toms officials on their experiences of administeringrules of origin. The following summarizes the mainconclusions drawn from these responses from cus-toms administrations.

Rules of Origin, Trade, and Customs 205

Checking the Authenticity and Validityof Certificates of Origin

Table 9.1 shows the proportion of respondents con-firming the involvement of their customs authori-ties in issuing certificates of origin for productsexported from their customs territory, in checkingthe validity and authenticity of certificates of originon products exported, in checking the accuracy ofsuch certificates, and in responding to requestsfrom other customs authorities for informationregarding such certificates of origin.

About two-thirds of the customs administra-tions that responded confirmed that their adminis-trations were responsible for issuing certificates oforigin to exporters under at least one trade scheme.The vast majority of customs administrations areinvolved in checking the validity and authenticityof certificates of origin for exports and in confirm-ing the accuracy of the country indicated as the ori-gin of the product. Those administrations notinvolved are typically those in which the certificateof origin is based upon self-certification. Finally, afurther task for customs in administering preferen-tial rules of origin is in responding to requests forinformation on origin matters from other customsadministrations, again reflecting the involvementof public authorities in matters relating to origindocumentation in most preferential trade schemes.This information confirms that in most countriescustoms plays a key role in administering systemsof rules of origin on exports as well as imports.Customs clearance for exports from many coun-tries is influenced by the need for the customsauthorities to check preferential origin informa-tion. An important exception arises in schemes thatallow for self-certification by exporters.

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

Customs Role Proportion of Responses (percent)

Issues certificates of origin to exporters 66Checks the validity and authenticity of the certificate of

origin for export 88Checks the accuracy of the indication of origin for export 90Provides origin information to requesting administrations 91

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

Difficulties arise for businesses and for customswhen the same product has different countries oforigin depending upon the market, and the rules oforigin of the market, for which it is destined. Forexample, at present clothing companies in certainAfrican countries can obtain duty-free access to theU.S. market under AGOA (with liberal rules of ori-gin), but exactly the same product will be deniedduty-free access to the EU under the EBA Agree-ment (because of the requirement that the productbe manufactured from yarn under the EU rules oforigin). A company in Singapore could find that itsproduct can enter ASEAN markets duty free, by sat-isfying the maximum import content requirementof 60 percent, but does not satisfy the origin rulesof the Singapore–Japan agreement. This consider-ably complicates production and investment deci-sions. It also increases the burden on customs inclearing exports because shipments from the sameestablishment of the same product but to differentmarkets will need to be individually assessed.

Labor Requirements to Deal with PreferentialRules of Origin

Table 9.2 shows that 52 percent of those customs offi-cials who responded accepted that the clearance ofexports for preferential access overseas requires moremanpower and that almost three-quarters of respon-dents believe that clearance of preferential importsrequires more manpower to deal with issues arisingfrom the preferential rules of origin. One element ofthis is likely to be that in most trade agreementsproof of origin is required for every single shipment.Of the respondents to the survey, 88 percent reportedthat proof of origin must be presented for each andevery shipment. Thus, even identical shipmentsmade at different times still require individualcertificates of origin, which may then be checked bycustoms for validity, authenticity, and accuracy.

These responses support the argument that therequirements generated by rules of origin underpreferential trade agreements have importantimplications for customs and for trade facilitation.Preferential trade agreements increase the burdenon customs. This burden will be greater the morecomplicated the rules of origin and the more man-power resources that are required to check con-formity with those rules of origin. It is interestingto note that 42 percent of all respondents and morethan half (55 percent) of administrations in devel-oping countries could foresee additional preferen-tial rules of origin coming into operation withinthe next 12 months. This reflects the proliferatingnumber of free trade agreements. It also, however,implies a trend toward an increasing burden oncustoms and, given the above finding, additionalresources will be required to effectively implementthese new agreements if trade facilitation is not tobe compromised.

Overlapping Rules of Origin From Multiple FTAs

Most countries are party to more than one prefer-ential trade agreement. In certain cases the samecountries are partners in different trade agree-ments. For example, the developing countries inSub-Saharan Africa can now export to the EU andreceive preferential access under the CotonouAgreement or under EBA, which is a part of theGSP. These two schemes have rules of origin thatdiffer in certain key respects. There is full cumula-tion between ACP countries under the Cotonourules of origin but only bilateral cumulation withthe EU is possible under the GSP rules of origin. Asnoted earlier, the de minimis or tolerance levels dif-fer between the two schemes. (See Brenton 2003 formore details.) In Southern Africa, countries such asNamibia and Swaziland are members of bothSADC and COMESA, which have different rules of

206 Customs Modernization Handbook

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

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

For exports 52For imports 73

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

origin. Indeed, as Figure 9.1 shows, the issue ofmembership in multiple trade agreements andoverlapping rules of origin is a major feature ofregional trade agreements in Africa.

Table 9.3 shows the views of respondents to thequestionnaire on whether such overlapping rulesof origin cause particular difficulties for customs.Almost half the respondents said that in theirexperience overlapping rules of origin were aproblem. Of respondents in Africa, two-thirdsagreed that problems arose from the presence ofoverlapping rules of origin. This suggests thatthere would be gains from some coordination ofrules of origin across regional trade agreementswith common members. Further, it suggests that amovement toward simple and clear rules of originin preferential trade agreements would help

minimize the problems caused by overlappingrules of origin.

Implementation Difficulties of theValue-Added Criterion

More than 75 percent of the respondents reportedthat, of the different methods of conferring origin,the value-added criterion was particularly difficultto implement. This is a striking result but one thatis understandable given the heavy demands on dataand calculations made by value-added rules. Value-added rules lack predictability because changes infactors outside the firm, such as exchange rates, canlead to different determinations of origin. This isimportant because, as shown in table 9.B.1, the vastmajority of trade agreements use the value-added

Rules of Origin, Trade, and Customs 207

Egypt

Burundi*Rwanda*

DjiboutiEritreaEthiopiaSudan

IGAD

Somalia

Kenya*

SACU

Namibia*Swaziland*

COMESA Common Market for Eastern and Southern AfricaEAC East African Cooperation IGAD Intergovernmental Authority on DevelopmentIOC Indian Ocean CommissionSACU Southern African Customs UnionSADC Southern African Development Community*RIFF Regional Integration Facilitation Forum

BotswanaLesothoSouth Africa

Angola

Tanzania*

Mozambique

Malawi*Zambia*Zimbabwe*

Mauritius*Seychelles*

Comoros*Madagascar*

Reunion

Dem. Rep.Congo.

Uganda*

SADC

EAC

IOC

COMESA

FIGURE 9.1 Regional Trade Agreements in Eastern and Southern Africa

Source: World Bank staff.

criterion for at least some product codes. However,the restrictiveness of value-added rules is moreapparent than for other methods, which tend to bemore prone to capture by domestic protectionistinterests. Nevertheless, trade within regional orpreferential agreements could be facilitated by areview of value-added rules with a view to simplify-ing their implementation, for example, throughagreement on standard formulas to be used in cal-culation, and perhaps by providing for alternativemeans of conferring origin, such as through changeof tariff classification.

These responses from customs administrationsconfirm what may be obvious to some, but isclearly worth stating, that implementing preferen-tial trade agreements increases the burden on cus-toms. Limited resources and weak administrativecapacity in many developing countries mean thatthere are inevitable repercussions for trade facilita-tion arising from these trade agreements. At thevery least, when designing trade agreements theparticipants should bear in mind the implicationsfor customs and that if such agreements are to beeffective in stimulating trade, issues of administra-tive capacity in customs need to be considered.Complicated systems of rules of origin increase thecomplexity of customs procedures and the burdenupon origin certifying institutions. In a period inwhich increasing emphasis has been placed upontrade facilitation and the improvement of efficiencyin customs and other trade-related institutions, thedifficulties that preferential rules of origin createfor firms and the relevant authorities in developingcountries is an important consideration.

In general, clear, straightforward, transparent,and predictable rules of origin that require little orno administrative discretion will add less of a bur-den to customs than complex rules. In this regard,if the objective is to stimulate trade, the use of gen-

eral rather than product-specific rules appears to bemost appropriate for preferential rules of originapplied by and applied to developing countries.Less complicated rules of origin encourage tradebetween regional partners by reducing thetransactions costs of undertaking such trade rela-tive to more complex and restrictive rules of origin.

The Doha Round and Rulesof Origin

Rules of origin are not directly mentioned in theministerial text that launched the Doha Develop-ment Round, although ministers have called forcompletion of the HWP for nonpreferential rules oforigin. As noted, there has been some discussion ofrules of origin in the context of special and differen-tial treatment in using preferential rules of origin toachieve development objectives through generatingregional trade. As discussed earlier, rules of originare unlikely to be appropriate measures for attainingsuch objectives and their use could well be counter-productive. Although rules of origin are not explic-itly on the agenda in the Doha negotiations, it isclear that the outcome of these negotiations couldhave important implications for rules of origin andat the same time that the rules of origin that coun-tries have adopted will have important implicationsfor the impact of any agreement.

For example, progress in clarifying the applica-tion of antidumping measures and the effectiveliberalization of all remaining quotas on textiles andclothing products, as mandated under the UruguayRound Agreement on Textiles and Clothing, couldfacilitate progress in the harmonization of nonpref-erential rules of origin because these trade policyinstruments have been at the heart of disputes con-cerning the determination of nonpreferential ori-gin. Preferential rules of origin have importantimplications for the impact of any MFN tariff cuts

208 Customs Modernization Handbook

TABLE 9.3 Overlapping Trade Agreements Cause Problems for Customs

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

All respondents 48Respondents in Sub-Saharan Africa 67

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

that are agreed on between preferential partners. Astariffs are cut, margins of preference decline and thepotential threat of trade deflection diminishes.Given the additional administrative costs of provingpreferential origin, it is likely that rules of origin forproducts with a margin of preference of less than 3percent are unnecessary, because in their absencethere will be no trade deflection.

Restrictive rules of origin constrain the ability ofdeveloping countries to benefit from preferences.This is important in the context of ongoing discus-sions over special and differential treatment fordeveloping countries and concerns regarding theerosion of the preferences currently granted to suchcountries by rich, industrialized countries. On theone hand, this becomes all the more important asmargins of preference decline. On the other, whererestrictive rules of origin prevent the full use ofpreferences, the impact of MFN tariff reductionson preference-receiving countries is ambiguous.Countries with low levels of preference utilizationcould gain because the benefits of MFN tariffreduction could exceed any losses due to preferenceerosion. For example, it was noted earlier that only36 percent of Cambodia’s exports to the EU areactually granted the zero duty access for which theyare eligible. This implies that MFN tariff reductionswill benefit 64 percent of current exports whilepreference erosion will have an impact on only justover one-third of Cambodia’s exports to the EU.

Either way, it is clear that the liberalization ofindustrialized country rules of origin under theGSP, particularly those governing imports of tex-tiles and clothing and food products, would haveimportant beneficial impacts for developing coun-tries such as Cambodia. More liberal rules of originwould help mitigate the impact of MFN tariffreductions on those products currently receivingpreferences and help developing countries fully uti-lize the preferences that are available to them. Theanalysis included in this chapter would suggest asimple and clear set of rules of origin that are com-mon across preference-granting countries.

Key Operational Conclusions

The nature of rules of origin will typically reflectthe purpose that is set for them, the transparency ofthe process by which they are determined, and thecomposition of the group involved in that process.

Within preferential trade areas, complex andrestrictive rules of origin act to dampen theincrease in competition for final producers within acountry from suppliers in partner countries andstimulate intra-area exports of intermediate prod-ucts by diverting demand away from third-countrysuppliers. Such rules typically emerge when theprocess by which they are determined lacks trans-parency and openness and does not have wide-spread participation and in particular is dominatedby input from domestic industry. If the purpose setfor preferential rules of origin is simply to preventtrade deflection, a simple and more liberal set ofrules of origin implemented through general ratherthan product-specific rules would be the result. Inthe current globalized world market such rules aremore likely to stimulate trade and investment in theregion by providing producers as much flexibilityas possible in sourcing their inputs without com-promising the ability to prevent transshipment ofgoods from third countries that are not members ofthe agreement.

What is important is that the purpose set for therules of origin is clearly specified and is consistentwith the objectives that have been set for the partic-ular trade agreement or policy. If the objective is tofoster trade and development, this is best achievedthrough simple and liberal rules of origin ratherthan using rules of origin as opaque measures oftrade protection. In this way the rules of origin area key trade policy issue and their determinationshould be open and transparent with participationfrom all affected groups. The rules of origin are amajor factor determining whether preferentialtrade agreements work in achieving their objec-tives. The analysis of this chapter leads to the fol-lowing broad conclusions:

• Restrictive rules of origin constrain interna-tional specialization and discriminate againstsmall low-income countries where the possibili-ties for local sourcing are limited. Simple, con-sistent, and predictable rules of origin are morelikely to foster the growth of trade and develop-ment. Rules of origin that vary across prod-ucts and agreements add considerably to thecomplexity and costs of participating in andadministering trade agreements. The burden ofsuch costs falls particularly heavily upon smalland medium-sized firms and upon firms in

Rules of Origin, Trade, and Customs 209

210 Customs Modernization Handbook

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

Rule Advantages Disadvantages Key Issues

a. A positive determination of origin typically takes the form of “change from any other heading,” asopposed to a negative determination of origin, such as “change from any other heading except for theheadings of chapter XX.” It is worth noting that change of tariff classification, particularly with a negativedetermination of origin, can be specified to have an effect identical to that of a specific manufacturingprocess. See box 9.2 for an example.Source: Authors.

Change of tariff classification in theHarmonized System

Value-added

Specific manufacturingprocess

Consistency with nonpreferential rules of origin.

Once defined, the rule isclear, unambiguous,and easy to learn.

Relatively straightfor-ward to implement.

Clear, simple to specify,and unambiguous.

Allows for general ratherthan product-specificrules.

Once defined, clear andunambiguous.

Provides for certainty ifrules can be compliedwith.

Harmonized Systemnot designed forconferring origin; as a result there areoften manyindividual product-specific rules, whichcan be influenced bydomestic industries.

Documentary require-ments may bedifficult to complywith.

Conflicts over theclassification ofgoods can introduceuncertainty overmarket access.

Complex to apply—requires firms to havesophisticatedaccounting systems.

Uncertainty due tosensitivity to changesin exchange rates,wages, commodityprices, and so forth.

Documentary require-ments can beburdensome anddifficult to complywith.

Leads to product-specific rules.

Domestic industriescan influence thespecification of therules.

Can quickly becomeobsolete due totechnologicalprogress andtherefore requirefrequentmodification.

Level of classification atwhich changerequired—the higherthe level, the morerestrictive.

Can be positive (whichimported inputs canbe used) or negative(defining caseswhere change ofclassification will notconfer origin) testa—negative test morerestrictive.

The level of value-added required toconfer origin.

The valuation methodfor importedmaterials—methodsthat assign a highervalue (for example,CIF) will be morerestrictive on the useof imported inputs.

The formulation of thespecific processesrequired—the moreprocedures required,the more restrictive.

Should test be negative(processes or inputsthat cannot be used)or positive (what canbe used)? Negativetest more restrictive.

An

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Yes—

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Yes

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Yes

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Sing

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N =

Ass

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outh

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Asi

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AC

M =

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Am

eric

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on M

arke

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ARI

CO

M =

Car

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an C

omm

unity

; CO

MES

A =

Com

mon

Mar

ket

for

East

ern

and

Sout

hern

Afr

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GSP

= G

ener

al S

yste

m o

f Pre

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nces

; MER

CO

SUR

=M

erca

do C

omun

del

Sur

; NA

FTA

= N

orth

Am

eric

an F

ree

Trad

e A

gree

men

t; S

AA

RC =

Sou

th A

sian

Ass

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for

Regi

onal

Coo

per

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AC

U =

Sou

ther

n A

fric

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ms

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on;

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e:In

the

col

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“Cha

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of T

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Cla

ssifi

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umbe

rs in

bra

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s gi

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whi

ch c

hang

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ay b

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qui

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; a. W

ithin

And

ean,

ASE

AN

, CA

CM

, SA

ARC

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a 5

0 p

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nt v

alue

-add

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equi

rem

ent

in t

he c

ount

ry o

f exp

ort.

b. A

ltern

ativ

e ru

les

for

text

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and

clot

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pro

duct

s, o

ften

in t

erm

s of

wei

ght

rath

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han

valu

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ctor

al e

xem

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ns a

re c

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or e

xam

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, the

EU

–Sou

th A

fric

a ag

reem

ent

excl

udes

cer

tain

mea

t p

rodu

cts,

fish

, and

alc

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ever

ages

and

tob

acco

from

the

gen

eral

tole

ranc

e ru

le. U

nder

NA

FTA

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low-income countries. Complex systems of rulesof origin add to the burdens of customs and maycompromise progress on trade facilitation.

• Cumulation mechanisms are important. Fullcumulation provides for deeper integration andallows for more advanced countries to outsourcelabor-intensive production stages to low-wagepartners. Full cumulation allows low-incomecountries the greatest flexibility in sourcinginputs. Nevertheless, the sometimes-onerousdocumentary requirements and administrativedifficulties that can be associated with full cumu-lation suggest that diagonal cumulation shouldalso be permitted.

• The value-added criterion appears to be particu-larly difficult to implement from the perspectiveof customs. Agreement on a standard formulafor calculation would be particularly helpful.Providing traders with alternative means ofproving origin could be an important way ofincreasing flexibility in trade agreements.

• Harmonization of nonpreferential rules of origin,and consolidation, if not harmonization, of pref-erential rules would bring substantial gains interms of increasing the predictability of condi-tions under which companies trade and in reduc-ing the burden on customs in administering boththe multilateral and preferential trade agreements.

The analysis leads to the following recommen-dations:

• Specifying generally applicable rules of origin,with a limited number of clearly defined and jus-tified exceptions, is appropriate if the objective isto stimulate integration and minimize the bur-dens on firms and customs in complying withand administering the rules. Unnecessary use ofa detailed product-by-product approach to rulesof origin is likely to lead to complex and restric-tive rules of origin and to constrain integration.

• Producers should be provided with flexibility inmeeting origin rules, for example, by specifyingthat either a change of tariff requirement24 or avalue-added rule can be satisfied.

• When change of tariff classification is used, thelevel of the classification at which change is

required should, as much as possible, be com-mon across products. Change at the headinglevel seems most appropriate as a principal rule.

• Preferences granted by Organisation for Eco-nomic Co-operation and Development coun-tries would be more effective in stimulatingexports from developing countries if they weregoverned by less restrictive rules of origin. Ide-ally, rules of origin for these schemes should becommon. The WTO provides an appropriateforum by which to achieve this objective. Pro-ducers in developing countries should be able togain preferential access to all industrializedcountry markets if their product satisfies a sin-gle origin test.

• Restrictive rules of origin should not be used astools for achieving economic developmentobjectives, as they are likely to be counterpro-ductive. The potential benefits of trade agree-ments among developing countries can be sub-stantially undermined if those agreementscontain restrictive rules of origin.

• Bilateral agreements between a member of anexisting regional trade agreement and a thirdcountry should provide for an alternativeapproach to allow for the benefits of both diago-nal and full cumulation with the other membersof that regional group.

Further Reading

Flatters, F., and R. Kirk. 2003. “Rules of Origin as Tools of Devel-opment? Some Lessons from SADC.” Presented at InstitutNational de la Recherche Agronomique Conference on Rulesof Origin. Paris. May. www.inra.fr/Internet/Departements/ESR/UR/lea/actualites/ROO2003/articles/flatters.pdf.

Garay, S., Luis Jorge, and Rafael Cornejo . 2002. “Rules of Ori-gin and Trade Preferences.” In Bernard Hoekman, PhilipEnglish, and Aaditya Mattoo, eds. Development, Trade, andthe WTO, a Handbook. Washington, D.C.: The WorldBank.

Harilal, K., and P. Beena. 2003. “The WTO Agreement on Rulesof Origin: Implications for South Asia.” Working Paper 353.Trivendrum, India: Centre for Development Studies.http://www.cds.edu/download_files/353.pdf

Hirsch, M. 2002. “International Trade Law, Political Economyand Rules of Origin: A Plea for a Reform of the WTORegime on Rules of Origin.” Journal of World Trade 36(2):171–88.

References

The word processed describes informally reproduced works thatmay not commonly be available through libraries.

Brenton, P. 2003. “Integrating the Least Developed Countriesinto the World Trading System: The Current Impact of EU

212 Customs Modernization Handbook

24. Or, to a very limited extent, specific manufacturing processesor operations.

Preferences Under Everything But Arms.” Journal of WorldTrade 37(3): 623–46.

Brenton, P., and Manchin, M. 2003. “Making EU Trade Agree-ments Work: The Role of Rules of Origin.” The World Econ-omy 26(5): 755–69.

Cadot, O., J. de Melo, A. Estevadeordal, A. Suwa-Eisenmann, andB. Tumurchudur. 2002. “Assessing the Effect of NAFTA’sRules of Origin.” Research Unit Working Paper 0306. Labo-ratoire d’Economie Appliquée, Institut National de laRecherche Agronomique—France.

Cerrex. 2002. “The Usage of the EU Trade Preferences (GSP andLome).” Study prepared for DFID. London. Processed.

Croome, J. 1995. Reshaping the World Trading System—A Historyof the Uruguay Round. Geneva: World Trade Organization.

Dehousse, F., K. Ghemar, and P. Vincent. 2002. “The EU-USDispute Concerning the New American Rules of Origin forTextile Products.” Journal of World Trade 36(1): 67–84.

Estevadeordal, A., and E. Miller. 2002. “Rules of Origin and thePattern of Trade Between US and Canada.” Washington,D.C.: Inter-American Development Bank.

Estevadeordal, A., and K. Suominen. 2003. “Rules of Origin inFTAs in Europe and the Americas: Issues and Implicationsfor the EU-MERCOSUR Inter-Regional Association Agree-ment.” In G. Valladao and R. Bouzas, eds., Market Access forGoods and Services in the EU-Mercosur Negotiations. Paris:Chaire Mercosur de Sciences Po.

———. 2004. “Rules of Origin: A World Map and TradeEffects.” In A. Estevadeordal, O. Cadot, A. Suwa-Eisenmann,and T. Verdier, eds. The Origin of Goods: Rules of Originin Preferential Trade Agreements. Inter-American Develop-ment Bank and Centre for Economic Policy Research.Forthcoming.

European Commission. 2003. The European Community’s Rulesof Origin for the Generalised System of Preferences: A Guide forTraders. Brussels. http://europa.eu.int/comm/taxation_customs/customs/origin/gsp/index_en.htm.

Falvey, R. and G. Reed. 1998. “Economic Effects of Rules of Ori-gin.” Weltwirtschaftliches Archiv 134: 209–229.

Flatters, F. 2001. “The SADC Trade Protocol: Which WayAhead?” Southern African Update 10: 1–4.

———. 2002. “SADC Rules of Origin: Undermining RegionalFree Trade.” Paper presented at the Trade and IndustrialPolicy Secretariat Forum. Johannesburg. September.

Flatters, F., and R. Kirk. 2003. “Rules of Origin as Tools of Devel-opment? Some Lessons from SADC.” Presented at InstitutNational de la Recherche Agronomique Conference on Rulesof Origin. Paris. May.

Herin, J. 1986. Rules of Origin and Differences Between TariffLevels in EFTA and in the EC. Geneva: EFTA Secretariat.

Hirsch, M. 2002. “International Trade Law, Political Economyand Rules of Origin: A Plea for a Reform of the WTORegime on Rules of Origin.” Journal of World Trade 36(2):171–88.

Hoekman, B. 1993. “Rules of Origin for Goods and Services:Conceptual and Economic Considerations.” Journal of WorldTrade 27(4): 81–99.

Imagawa, H. and E. Vermulst. 2003. Rules of Origin in aGlobalized World: A Work in Progress. New York: Kluwer.Forthcoming.

Inama, S. 2002. “Market Access for LDCs: Issues to beAddressed.” Journal of World Trade 36(1): 85–116.

Izam, M. 2003. “Rules of Origin and Trade Facilitation in Prefer-ential Trade Agreements in Latin America.” Paper pre-sented at International Forum on Trade Facilitation. Geneva.May 14–15. http://www.unece.org/trade/forums/forum03/presentations/ventura_en.pdf.

Krishna, K., and A. Krueger. 1995. “Implementing Free TradeAreas: Rules of Origin and Hidden Protection.” NBER Work-ing Paper 4983. Cambridge, Mass.: National Bureau of Eco-nomic Research.

Krueger, A. 1997. “Free Trade Agreements Versus CustomsUnions.” Journal of Development Economics 54(1): 169–187.

Mattoo, A., D. Roy, and A. Subramanian. 2002. “The AfricaGrowth and Opportunity Act and its Rules of Origin:Generosity Undermined?” The World Economy 26(6):829–51.

Official Journal of the European Communities. 2000. L317. Vol-ume 43. December 15. http://europa.eu.int/eur-lex/en/archive/2000/l_31720001215en.html.

Palmeter D. 1997. “Rules of Origin in Regional Trade Agree-ments.” In P. Demaret, J. F. Bellis, and G. Garcia Jimenez, eds.Regionalism and Multilateralism after the Uruguay Round:Convergence, Divergence, and Interaction. Brussels: EuropeanInteruniversity Press.

Pricewaterhouse Coopers. 2002. “Strengthening the AFTA Rulesof Origin.” Presentation to the 10th Meeting of the ASEANDirectors-General of Customs, Singapore.

Sapir, A. 1998. “The Political Economy of EC Regionalism.”European Economic Review 42(3-5): 717–732.

UNCTAD (United Nations Conference on Trade and Develop-ment). 2003. “Main Recent Initiatives in Favour of LeastDeveloped Countries in the Area of Preferential MarketAccess: Preliminary Impact Assessment.” Note for the 50thSession of the Trade and Development Board. October 6–17.Document TD/B/50/5. Geneva: UNCTAD Secretariat.

UNCTAD and the Commonwealth Secretariat. 2001. “Duty andQuota Free Market Access for LDCs: An Analysis of QuadInitiatives.” London and Geneva. http://www.unctad.org/en/docs/poditctabm7.en.pdf.

U.S. International Trade Commission. 2004. “Harmonized TariffSchedule of the United States. General Notes.” Washington,D.C. http://hotdocs.usitc.gov/tariff_chapters_current/0410gn.pdf.

World Customs Organization. 2003. “Report of the 21st Sessionof the Technical Committee on Rules of Origin.” DocumentOC0085E2. February 24–25. Brussels.

WTO (World Trade Organization). 2002a. “Committee onRegional Trade Agreements — Rules of Origin Regimes inRegional Trade Agreements—Background Survey by theSecretariat.” Document WT/REG/W/45. April 5. Geneva.

———. 2002b. “Committee on Rules of Origin—Eighth AnnualReview of the Implementation and Operation of the Agree-ment on Rules of Origin—Note by the Secretariat.”Document G/RO/55. December 3. Geneva.

———. 2002c. “Committee on Rules of Origin—Report by theChairman of the Committee on Rules of Origin to theGeneral Council.” Document G/RO/52. July 15. Geneva.

Rules of Origin, Trade, and Customs 213

215

10DUTY RELIEF AND

EXEMPTION CONTROL

Adrien Goorman

TABLE OF CONTENTS

Duty Relief for Inward Processing 216

Warehousing, Temporary Admission,and Transit 230

Exemptions 233

Operational Conclusions and Guidelines 238

Annex 10.A Checklist for Duty Relief andExemption Control 240

Further Reading 241

References 241

LIST OF BOXES

10.1 Duty Relief and ExemptionRegimes 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 WarehouseFacility 224

10.6 Customs Administration of the Aqaba ExportProcessing Zone 229

10.7 Thailand’s Move to Open BondArrangements 232

10.8 Computer Application for Management ofInvestment Project Exemptions 237

10.9 Reimbursement of Taxes and Customs Dutieson Imported Petroleum Products in Mali 238

Adrien Goorman is an independent customs administrationconsultant, former Deputy Division Chief, Tax AdministrationDivision of the Fiscal Affairs Department of the InternationalMonetary Fund. This chapter has benefited greatly from cooper-ation with the Inter-American Development Bank.

This chapter deals with two aspects of customsadministration that are of considerable economic,fiscal, and administrative importance—adminis-tration and control of duty relief regimes for tem-porarily imported goods, and administration andcontrol of all other duty exemptions.

Duty relief refers to the customs regimes underwhich goods are imported with suspension of dutypayment pending their re-exportation. Such dutyrelief might be for temporary admission for inwardprocessing, manufacturing under bond, export

processing zones, temporary admission for re-exportation in the same state, customs warehous-ing, and transit. It also refers to the regime underwhich duties paid on importation are refundedwhen the goods are re-exported (drawback).1

Exemption control refers to the mechanismsused by customs to administer and monitor full orpartial duty exemptions unrelated to exportation

1. The duty relief regimes are often referred to as duty suspensionregimes, economic regimes, or special customs regimes. There isno uniformity in the use of the terms “relief” and “exemption”among customs laws and practitioners. In the Revised Kyoto Con-vention the term “duty relief” refers to what is generally known asexemption, while each duty suspension regime is dealt with underits individual name—inward processing, drawback, free zones,customs warehousing, temporary admission, and so on.

or re-exportation. The main exemption categoriesconcern investment incentives; imports for the gov-ernment, foreign-financed projects, and diplomaticrepresentations; imports of relief goods; andimports for institutions with charitable, cultural,educational, or religious purposes.

Experience shows that many developing coun-tries have difficulty properly administering andmonitoring duty relief regimes and exemptionregimes. This has resulted in abuse, fraud, and rev-enue leakage. In the absence of smoothly operatingduty relief mechanisms, export manufacturers haveto produce at higher cost than would be the case ifthey had full and easy access to production inputsat world prices. Therefore, their competitiveness inexport markets is impaired.

The chapter gives an overview of the main dutyrelief and exemption regimes, and summarizestheir economic rationale, as well as the mainrequirements for effective administration. Thechapter also reviews the experiences relating to theimplementation of various systems in a number ofcountries and provides guidelines for best practice.The first section reviews the regimes for duty relieffor inward processing. The second section con-centrates on duty relief for goods temporarilyimported for reasons other than processing. Thethird section deals with economic and administra-

tive aspects of outright exemptions. The final sec-tion summarizes the operational conclusions andguidelines. Annex 10.A provides a checklist for dutyrelief and exemption control.

A systematic classification of the main dutyrelief and exemption regimes in operation aroundthe world is presented in box 10.1.

Duty Relief for Inward Processing

This section first reviews the economic rationalefor duty relief for inward processing, identifies themain approaches to duty relief, discusses adminis-trative issues relevant to all duty relief systems, thenreviews administrative aspects of the main systemsone by one.2

Economic Rationale

Governments levy duties on the importation ofgoods to collect fiscal revenue or protect industrialactivity. When the inputs are imported for themanufacture of export products, the duties paid on

216 Customs Modernization Handbook

BOX 10.1 Duty Relief and Exemption Regimes

Duty relief concerns the exemption from dutiesand taxes on temporary imported goods or, ifduties and taxes were paid on their importation,the refund of these duties and taxes upon re-exportation.

Goods imported for re-exportation after processingTemporary admission for inward processing

(TAP) Manufacturing under bond (MUB)DrawbackExport processing zone (EPZ)

Warehousing, temporary admission, and transitCustoms warehousingTemporary admission for exportation in the

same stateTransit

Exemption involves importation under full orpartial waiver of import duties for reasons unre-lated to exportation or re-exportation. Theseexemptions exist for a variety of government

policy objectives or result from internationalconventions and agreements.

International conventionsEmbassies and international organizations

Government social and economic objectivesGovernment importsFiscal incentives to investmentForeign financed projectsRelief goodsCharitable, religious, educational, cultural,

and other social purposes Noncommercial imports

Migrant workers, persons settling or resettlingin the country

Baggage allowancesSamples of no commercial valueInherited goods, gifts, trophies, medals, prizes,

and so forthOther noncommercial imports.

Source: Author.

2. The standards and guidelines of the Revised Kyoto Conven-tion with respect to the duty relief regimes are included inthe Convention as follows: temporary admission for inwardprocessing, Specific Annex F.1 on Inward Processing, SpecificAnnex D.2 on Free Zones, and Specific Annex F.3 on drawback.

them increase the cost of production and, there-fore, make it more difficult for the exporters to selltheir products abroad. The objective of duty reliefis to remove this tariff burden and to give exportersaccess to industrial inputs at world prices. This isdone through exempting the inputs at the stage ofimportation, or refunding the duties paid at thetime of importation, when the products in whichthe inputs are incorporated are exported. Customslaws make provisions for these regimes and estab-lish regulations for their administration andcontrol.

The economic justification for relieving exportproducers of the payment of duties on importedinputs rests on the destination principle of taxa-tion, under which no indirect taxes should be leviedon goods that are not destined for domestic con-sumption. Following this principle, there is noground for levying import duties, for instance,on goods in international transit, or on materialsand components imported for incorporation intomanufactured products that are subsequentlyexported.3 The failure to relieve export producersfrom import duties would effectively establish a taxon exports, increase their cost, and reduce the com-petitiveness of domestic manufacturers in exportmarkets.

In line with the destination principle, the refundof duties paid on the importation of industrialinputs incorporated in export products is accept-able under, and fully compliant with, World TradeOrganization (WTO) rules provided the refunddoes not exceed the actual amount of duties paid. Arefund that exceeds that amount would be equiva-lent to an export subsidy and would violate theWTO rules on Export Subsidies and Countervail-ing Duties.

Clearly, providing duty relief is only a secondbest alternative to a free trade regime. Free tradeeliminates the need for schemes to insulateexporters and obviates the administrative require-ments that are often difficult to meet. Most coun-tries do not have a free trade regime, however, andcan relieve export products from the burden ofimport duties and taxes only through the imple-mentation of one or more of the duty relief systems.

In today’s highly competitive economic environ-ment, exporters are compelled to attain a highdegree of efficiency in production and to cut pro-duction and marketing costs to the minimum ifthey are to survive in export markets. Therefore, itis important that policymakers and customs man-agers make available to the export sector duty reliefsystems that provide full (100 percent) relief fromthe duty burden on industrial inputs. It is alsoimportant for policymakers and customs managersto create the conditions for effective administrationof these regimes. For customs administratorswhose responsibility it is to collect import dutiesaccording to the tariff schedule, the implementa-tion of duty relief regimes clearly establishes aproblem of customs control. Customs must estab-lish mechanisms to ensure that claims for dutyrelief are legitimate and correctly executed.

Prior Exemption versus Drawback

There are two basic approaches to providing dutyrelief for inward processing: (a) exempting goodsfrom the payment of the duties at the time they areimported, conditional upon their re-exportationafter processing (often referred to as temporaryadmission); and (b) drawback, which is the pay-ment of duties on the imported goods, with refundof the duties upon re-exportation of the goods afterprocessing. Prior exemption exists in differentforms, including temporary admission for inwardprocessing (TAP), manufacturing under bond(MUB), passbook system, variations on or combi-nations of these forms, and export processing zones(EPZs).

While prior exemption systems and drawbackhave the same objective, there are differences in theway they operate, in the benefits they provide to themanufacturer, and in the control measures customsmay want to put in place to protect revenue. Onesystem may be better suited to a particular exporterthan another. In general, exporters prefer priorexemption to drawback, but prior exemption car-ries greater revenue risk for the government becauseof the possibility of diversion of the importedgoods, or the products made from them, to the localmarket without duty payment. Drawback involvesless risk to revenue, but one disadvantage is that themanufacturer must pay the duties and taxes firstand then wait (often for a considerable period

Duty Relief and Exemption Control 217

3. Some countries charge a transit fee, which may have the char-acter of, for instance, a service charge for using the national roadsystem.

of time) before the refund is made, which reducesthe company’s working capital. Delays and uncer-tainties about repayments under the drawback sys-tem may also act as a disincentive to exporters, andmay lead them to factor the delays and uncertaintiesinto their cost and price calculations, thereby reduc-ing their competitiveness abroad.

It is in the interest of the export sector that allmanufacturers (from the large enterprise exportingthe bulk of its production to the occasional exportprocessor) have access to one or more schemes thatfit the type of business and provide full relief atminimum administrative and operational cost.Therefore, the best policy is to make both priorexemptions, in one or more of its forms, and draw-back available. If there is economic justification forestablishing free zones, EPZs should be made avail-able. However, EPZs are established on the basis ofa broader set of objectives and conditions, andinvolve a much bigger undertaking than other priorexemption regimes and drawback. They may not bean appropriate solution in many cases.

The availability in the domestic market of sub-stitute goods—materials that are identical indescription, quality, and technical characteristics tothe imported materials—should not be a determin-ing factor in whether to give export manufacturersaccess to duty relief systems. Even though the use ofimported materials may limit the development ofdomestic backward linkages, duty relief remainsconsistent with the policy objective of giving exportmanufacturers access to production inputs at worldprices.

Administration: From Physical Control to Audits

Traditionally, customs procedures to administer,control, and enforce duty relief schemes, as withother aspects of customs control, have relied heav-ily on physical control. Physical control allows cus-toms to monitor the movement of imported mate-rials into the manufacturer’s warehouse, the use ofthe materials in producing goods for export, thequantities produced, and the removal of finishedgoods from the factory for exportation. Physicalcontrols are burdensome to both customs andmanufacturers, and economically inefficient com-pared to accounts-based controls.

Over the last few decades the worldwide liberal-ization of trade, combined with rapid technological

developments, has led to a rapid expansion ofinternational trade and to cutthroat competition inexport markets. Trends in trade and industry,including the need for rapid delivery of goods, just-in-time inventory, and the use of technology, haveforced many customs administrations, in bothindustrialized and developing countries, to adoptmodern customs control strategies. Such strategiesare based on risk assessment and management,selective checking, post-importation audit, andextensive use of information technology. They con-centrate more on overall assessment of the traders’level of compliance than on verification of individ-ual transactions. For companies judged to representa low risk, customs reduces its level of regulatoryscrutiny and relies more on the company’s self-assessment of customs compliance. Thus, low-risktraders can operate under less onerous reportingand procedural arrangements, which largely facili-tates their import and export business. Experienceshows that such strategies not only substantiallyfacilitate trade, but are also far more effective inprotecting revenue than the old systems.

The ability to implement modern customs con-trol strategies differs from country to country.Among the factors that influence that ability are thedegree to which traders keep records and accounts,which is essential for accounts-based control to bemeaningful; the overall degree of modernization ofthe trading sector, which may determine the extentto which customs can interact electronically withtraders in connection with their foreign trade oper-ations; the level of trade liberalization (tariff level,openness of the economy), which may cause thetrading sector to be more or less tax-compliant; andthe degree to which human, financial, and physicalresources are made available to the customs depart-ment, which will help determine its ability torespond to the needs of the modern economy.Depending on these factors, some countries mayhave to rely on a higher level of physical controlthan others, until such time as the customs depart-ment has built up sufficient capacity to rely mainlyon accounts-based controls, and the trade regimeand trading environment are conducive to such anapproach.

Regardless of their degree of modernization, cus-toms administrations should adhere to the interna-tional standards and guidelines for administrationof the duty relief systems included in the Revised

218 Customs Modernization Handbook

Kyoto Convention. These standards and guidelinesare taken into account in the discussion, proposals,and guidelines that follow. No attempt is made tocover all the provisions of the Revised Kyoto Con-vention. Rather, the discussion concentrates onprinciples and practical measures for the design andeffective implementation of the duty relief regimes,and the experience of some countries in this arena.

Temporary Admission for Inward Processing

TAP is the regime under which materials can beimported, conditionally relieved from payment ofimport duties and taxes, on the basis that they areintended for manufacturing, processing, or repair,and subsequent exportation. The products result-ing from the processing under certain conditionsmay also be obtained from materials other thanthose imported for inward processing. (See Equiva-lence and Prior Equivalence below.) The TAPregime also covers contract or “job” processing,whereby the foreign customer remains the owner ofthe imported goods. TAP is being implemented inmany developed countries and in a number ofdeveloping countries.

Issues Effective implementation of TAP requiresa well-developed customs administration. Manu-facturers exporting a given minimum percentage oftheir production on a regular basis can requestadvance authorization for operating under the TAPregime. They may have to post a bond to secure thecustoms duties and are required to keep prescribedbooks and accounts to document the materialsimported and the final products made of them. Therate of yield (ratio of imported materials used inone unit of output) needs to be determined andagreed on between the manufacturer and the cus-toms administration, and updated when manufac-turing processes or tariff rates change. A controlmechanism needs to be set up by customs, in coop-eration with the producer, to periodically verify thepercentage of total production exported and thepercentage sold in the local market, and to deter-mine the amount of suspended duties and taxes tobe cleared (for the goods exported) and the amountof duties and taxes to be paid (for the goods sold inthe local market). This requires detailed accountingand careful verification by officers skilled in audit-ing manufacturers’ accounts.

As the system is administratively demanding, itnormally is not a practical solution for manufac-turers that export only a small part of their produc-tion, or export only occasionally. Such manufactur-ers should have access to a simpler system oftemporary admission or a smoothly operating sys-tem of drawback.

Operational and Administrative Requirementsand Procedures The main requirements foreffective operation and administration of the TAPregime include the following:

• Authorization. Manufacturers wanting to importunder TAP need to register for the system atcustoms. Authorization from customs is neededfor follow-up and control purposes. Upon thefirst application under the TAP regime, customsmay visit the plant to check that records andsystems are adequate for customs purposes andto find out more about the import and exporttrade.

• Security. The manufacturer will have to estab-lish security for the duty in the form of a bondto secure duty payment in case of abuse orfraud. The bond can be waived for establishedand solvent companies that pose no revenuerisk.

• Rate of yield. The ratio of imported materialsused in one unit of output needs to be deter-mined and agreed on between the manufacturerand the customs administration, and updatedperiodically and each time that manufacturingprocesses or tariff rates are changed.

• Importation. The manufacturer may importthe goods to be processed directly or buy themfrom another TAP-authorized trader. Onimporting directly, the manufacturer declaresthe goods for the TAP regime and the goods arereleased to the importer with suspension of theduties and taxes. When buying from anotherTAP-authorized trader, the manufacturer needsto provide its TAP registration number to thesupplier, and the manufacturer takes over theresponsibility for the suspended duties andtaxes from the supplier.

• Exportation and discharge of responsibility. Themanufacturer clears its responsibility for theunpaid duties and taxes mainly through expor-tation of the processed goods. Exportation

Duty Relief and Exemption Control 219

includes direct exportation, sales to duty-freeshops, sales by duty-free shops, sales to personsentitled to diplomatic privileges, and use asstores for bunkers on ships traveling to destina-tions abroad. Furthermore, the responsibility forthe unpaid duties can also be cleared by puttingthe goods in a customs warehouse or an EPZ,transferring the goods to another temporaryimportation regime, selling the goods to anotherTAP trader, and any other export-equivalentprocedures provided for in the national customslegislation.

• Diversion of goods to local market. Diversion ofgoods to free circulation beyond the authorizedquantity results in payment of the suspendedduties. Interest may be charged for the late pay-ment. Byproducts, scrap, and waste from theprocessing are normally subject to payment ofduty unless they are exported (national legisla-tion may differ).

• Periodic returns. The manufacturer files peri-odic returns to the duty relief unit at customsshowing the goods imported under the TAPregime or purchased from other TAP traders,and the destination of the goods after process-ing. There are two principal ways of accountingand controlling. One method is the matching ofexport documents with specific import docu-ments. This is a traditional and complicatedmethod, which should be avoided. The othermethod is to make a single, global declarationfor the total quantity of materials imported dur-ing a given period and the total quantity of finalgoods delivered for export and to the local mar-ket in the same period. Global declaration is theonly method that allows for effective implemen-tation of the system, and is the recommendedmethod.

• Prescribed books and records. The manufacturerneeds to maintain records and accounts of rawmaterials imported and duties and taxessuspended; materials stored; materials used inproduction; final goods produced; quantitiesexported; quantities sold in the local market;and byproducts, scrap, and waste resultingfrom the process. The records must enablecustoms to monitor the goods under temporaryadmission.

• Customs duty relief unit. Customs monitors andcontrols the TAP system through a special unit,

which may be called the Inward Processing unitor Duty Relief unit, for example. The unitreviews applications, gives authorizations for theTAP regime, reviews input–output ratios (ratesof yield), and monitors the performance of themanufacturer on the basis of periodic returns,periodic visits, and audits of its accounts. Addi-tional units at the customs offices in the mainindustrial centers may need to be established tomonitor and audit the manufacturing compa-nies approved under the system in these centers.Staff involved with the TAP should be ade-quately trained, particularly with respect toauditing.

• Computerization. The TAP control systemshould be computerized to allow for accuratefollow-up on temporarily imported materialsand the exported goods made from them; mon-itoring of the manufacturer’s duty suspensionaccount; and calculating and updating rates ofyield as a basis for calculating the use of materi-als in finished products. (Examples of comput-erized support for duty relief administration areincluded in boxes 10.2 and 10.3.)

The requirements can be simplified for (a) tradersimporting only occasionally for export processing,for instance when the total value of imports forprocessing in a calendar year does not exceed agiven amount, or the goods are imported for repair;and (b) operations that do not change the tariffclassification of the goods, such as simple opera-tions to ensure preservation, or improve presenta-tion and marketability, or prepare the goods fordistribution or sale.

In such cases, no prior registration for the sys-tem would be needed, but authorization wouldbe given for each importation at the customs office.The authorization form would identify theimported goods, the process, the processed prod-ucts, the rate of yield, and the re-exportation timelimit.

Equivalence and Prior Equivalence The prod-ucts resulting from manufacturing or processing,called compensating products, need not beobtained solely from goods admitted for inwardprocessing, because it may be necessary for themanufacturer to substitute goods of national originor that were previously imported with payment of

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Duty Relief and Exemption Control 221

BOX 10.2 The Reform of Duty Relief Regimes in Morocco

Inward processing is an indispensable aspect ofthe Moroccan economy. In 2002, duty reliefregimes accounted for over 50 percent of for-eign trade transactions. About 82 percent of theduty relief was under the TAP regime.

For many years the management of the dutyrelief regimes was disorganized and opaque,until it became totally unmanageable. In 1996more than 70,000 accounts, some established asfar back as 1985, were waiting to be regularized.These delays were due to complicated, bureau-cratic, and rigorous procedures involving exces-sive paperwork and meticulous recording andaccounting. All import and export shipmentswere examined and many samples were drawn.Traders suffered large operational delays, andsubstantial funds were tied up in governmentaccounts through delayed refund of securitydeposits.

A decision was made to implement twomeasures: complete reform of the procedures,and the regularization of the delays. The TAPregime was revised in close cooperation with theindustrial sector. The procedural reform intro-duced less rigorous and less cumbersomerequirements and allowed for more operationalflexibility, including the acceptability of differenttypes of guarantee, allowances in calculating therate of yield, and the option to sell part of theproduction in the local market with duty pay-ment but without interest. By 2003, over 90 per-

cent of the accounts were regularized, thanks tothe use of an automated mechanism for identify-ing anomalies and fraudulent activities, and thedevelopment of a procedure for identifying ficti-tious companies. A study of industrial sectorsand research in the field led to the sanctioning offictitious and fraudulent accounts.

In addition to these two measures, specialefforts were made to improve service to thetrading sector, including the reduction of clear-ance times to less than one hour, and the designof automated programs for the duty reliefregimes. This gives operators online informationabout progress in the processing of their decla-rations, their customs account situation, andtheir guarantee situation, as well as providing avirtual window through which they can executetheir clearance operations.

In recent years, Moroccan customs manage-ment has concentrated on motivating personneland stimulating innovation. Results are alreadyvisible, for instance in the introduction of a per-sonalized management system for the duty reliefoperations. This system responds to the needs ofboth trade facilitation and revenue control, andis fully integrated with the enterprises’ methodsof management. Already about 30 enterprisesmake use of this arrangement. Study andresearch for other improvements are ongoing.

Source: Steenlandt and De Wulf 2004.

duties and taxes. Such substitute goods need to beequivalent to the goods imported for inward pro-cessing that they replace.

Equivalence is the procedure that allows themanufacturer to use substitute goods in place ofTAP goods, as long as the substitute goods are infree circulation in the customs territory and can beconsidered equivalent to the TAP goods. To beequivalent, the substitute goods must be of thesame kind, technical specification, and commercialquality as the TAP goods. They must be mutuallyinterchangeable.

Prior export equivalence allows the exportationof products made from equivalent goods to takeplace before the TAP goods are imported. Severalcountries allow for duty-free importation of mate-rials of the same kind, technical specification, andquality as local materials that were incorporated in

goods produced by TAP-approved manufacturersfor export.4

Illustration of Successful TAP Reform As inwardprocessing is an important activity in the Moroccaneconomy, the duty relief regimes are an indispensa-ble aspect of the strategy to attract investors.

4. Such systems are available, for instance, in Brazil, Chile, andthe EU. This facility can be useful to the export manufacturer inseveral ways: The manufacturer can respond to urgent exportorders when insufficient TAP goods are in stock. When it is diffi-cult to apportion imports in advance to TAP and free circula-tion, the manufacturer can import all goods to free circulationinitially and when it has exports, it can import TAP-equivalentgoods to replace the goods used from the duty-paid stock. Whenthe manufacturer has underestimated its TAP needs, it can sup-ply export markets with products made from free circulationmaterials, and then import TAP-equivalent goods to replenishthe duty-paid stock.

Box 10.2 summarizes the problems that had builtup over the years in the management of the reliefsystems and the kind of reforms undertaken by thegovernment to solve these problems and establishfar more efficient management of the TAP regime.

Variations on the TAP Procedure Fiji’s duty sus-pension scheme. The Fiji duty suspension scheme(DSS), introduced in 2002, is an inward processingsystem that aims at the full relief of the import tar-iff and tax burden on export products. The systemhas some unique features of design, management,and operation. Since its inception, Fiji’s DSS hasbeen successful in achieving the stated objectives. Itis managed by a private sector organization, knownas The Exporters Club, on behalf of the Fiji IslandsRevenue and Customs Authority. The system has ahybrid character with features of both the TAP anddrawback mechanisms. For more detail, see thesummary description in box 10.3.

Passbook. The passbook system is a mechanismfor providing duty relief under the conditionalexemption system, which has been used in a num-

ber of Asian countries including India, Bangladesh,and Nepal. It operates using a ledger (the passbook)through which both the trader and customs keeptrack of the quantity and value of materialsimported and the processed goods exported.5 Theledger also keeps the trader’s security account. For adescription of how it operates in Nepal, seebox 10.4.

Manufacturing under bond. The customs regu-lations of many countries incorporate provisionsfor manufacturing under bond (MUB) to provideduty relief to export manufacturers. The system isin operation in numerous countries includingBangladesh, Canada, India, Nepal, Tanzania, andthe United States. This system is similar to TAP.

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BOX 10.3 Fiji’s Duty Suspension Scheme

Fiji’s DSS was developed to facilitate and encour-age exportation by giving exporters access tomanufacturing inputs at world prices.

The DSS is managed by a private sector–runorganization—The Exporters Club—on behalf ofFiji Islands Revenue and Customs Authority.

Members must be in the business of import-ing materials for transformation into products forexport. The Exporters Club assesses the qualifica-tions of applicants, recommends a list of materi-als to be imported and subsequently used in theproduction of exports, calculates advance creditsand Entitlement Proportion (EP) ratios, andadvises customs when all requirements are met.

The exporter receives credits for every dollarof exports achieved under the system. It can usethese credits to import approved materials dutyfree. The credit is based on the EP, that is, theproportion of imported goods required to pro-duce one unit of the export product. As long asthe company operates within its EP ratio, it cancontinue to import approved goods duty free.The EP is calculated initially when companiesenter the scheme, using the company’s importand export history and an audited set ofaccounts. For the first export operation, compa-nies can be provided with advance credits that

would enable them to import for two monthsusing the credits.

Specially developed software has been cre-ated for customs as an attachment to the ASY-CUDA system. The software enables theExporters Club to manage the day-to-day opera-tions of the program and customs to auditarrangements with individual members. Mem-bers have access to their own data, but cannotaccess the details of other members.

The Exporters Club is a nonprofit organizationowned by eight peak industry groups involved inpromoting exports. A board manages the Club,representing the owners and the Customs Ser-vice. In addition to the abovementioned respon-sibilities, the Club monitors the performance ofeach club member. This is done by a computer-ized system that calculates the amount of creditsearned and automatically reduces these creditswhen products are imported. To cover the costof operations, the Club charges an applicationand assessment fee, an annual subscription fee,and an activity fee.

Source: T. O’Connor, Director General of Cus-toms, Fiji Islands Revenue and Customs Author-ity. Note prepared for this chapter (June 2003).

5. The passbook system in Bangladesh is difficult to monitor, asexports and imports are recorded in different passbooks if theyare effected through different customs houses. Also, the descrip-tion of the imports does not follow the Harmonized Systemclassification, complicating the task of audits. A Bank project isfinancing the automation of the Warehouse and Bond system.Once implemented, this will gradually replace the passbooksystem.

Like TAP, it allows manufacturers to import rawmaterials without duty payment. On exportation ofthe manufactured products, the duties on the cor-responding amount of raw materials are cleared.The MUB system is especially useful for the assem-bly of goods made entirely from imported dutiablecomponents, or goods using a high content ofimported dutiable inputs. In these cases, the savingsin financing costs relating to duty payments can besubstantial.

Considering that the primary objective ofauthorizing MUB is to promote exports, ratherthan to postpone the payment of customs duty onthe imported materials and components, there isno advantage in allowing manufacture under bondif most of the production is sold in the local mar-ket. However, it may be necessary for the manufac-turer to sell parts of the goods produced in thedomestic market.6 The government must decide

the minimum percentage of production required tobe exported.

Many developing countries have had difficultymonitoring that all imported inputs are actuallyused in the manufacture of export goods and notdiverted to other industrial uses, and that all fin-ished products are actually exported. Furthermore,the legal and administrative requirements imposedon MUB users often are excessive and costly. Insome cases, the license for operating the bondedwarehouse needs to be renewed every year. The usercan access the raw materials only when customsopens the warehouse, and procedures involve toomuch paperwork and bureaucratic hassle.

The operational and administrative require-ments and procedures for the MUB regime arebroadly similar to those discussed under the TAPregime. Traditionally, MUB programs have reliedmore heavily on strict physical controls than theTAP regime, but here, too, physical control is grad-ually being replaced by accounts-based control. Inmost developing countries, physical controls arestill heavily relied on.

Such controls may involve supervision of thetransfer of the imported materials from the docksto the bonded warehouse; joint control by customsand the manufacturer of access to the warehouse;control over access to the raw materials, finished

Duty Relief and Exemption Control 223

BOX 10.4 The Passbook System in Nepal

Following years of disappointment with the fail-ures of a drawback system, Nepal introduced thepassbook system in 2001. Under this system,export manufacturers are relieved from the dutyburden on materials imported for processing ortransformation into products to be exported orsold in the local market for foreign currency. Thesystem is available only for operations that add atleast 20 percent of value to the imported goods.The rate of yield, that is, the quantity of importedmaterials used in the production of one unit ofexport product, needs to be approved by theTechnical Committee of the Department ofIndustry. The exportation or sale needs to hap-pen within 12 months following importation.

On importation, the quantity, value, andduties and taxes suspended are recorded in thepassbook. Security in the form of a cash depositis required to cover duties and taxes suspended,and credit for the deposit is given in the pass-book. On proof of exportation of the processed

goods, the deposit corresponding to quantity ofinputs incorporated in the exported goods isreleased. For regular importers–exporters, thereleased amount is not refunded but used as adeposit for subsequent imports of materials.Excess amounts of deposit not used within onemonth are refunded. Failure to export within12 months after importation of the materialsresults in payment of the duties and a 10 per-cent penalty. The Department of Customs speci-fies the customs offices through which thetrader can import the materials and export theprocessed goods under the system. Any particu-lar company can import only through one givencustoms office. Such restrictions have createdproblems for some traders, but overall, the sys-tem has performed well. Traders have been gen-erally more satisfied with the passbook systemthan with the drawback system.

Source: Author.

6. This would be the case, for instance, when some of the pro-duction does not come up to the quality required on the inter-national market, but there may be a local demand for such prod-ucts; or when the company is not able to sell its entireproduction in export markets and finds it uneconomical torestrict production to the quantity it can sell abroad; or when anexport order is cancelled; or, finally, when the product manufac-tured in bond is in strong demand in the domestic market andwould have to be imported if the bonded factory is not allowedto sell to the local market.

goods, and any intermediate materials includingwastes stored in the warehouse; and physical super-vision of the exportation or other means of dis-posal of the finished products and other goods aris-ing from processing under bond.

Control can be exercised through simpler proce-dures similar to the TAP procedures that, whileprotecting the interest of revenue, also facilitatetrade. In brief, this would involve a security to pro-tect revenue; a formula expressing the rate of yield;prescribed accounts of production operations, thatis, raw materials received and used and final prod-ucts manufactured and exported; accounts-basedcustoms verification; and periodic unscheduledvisits to the factory to ensure that accounts are cor-rectly kept.

Computerizing MUB control can greatlyimprove the quality of control and the efficiency ofthe whole operation at savings for both the manu-facturer and the customs administration. Comput-erization allows for such functions as the electronictracking of goods moving into and out of thebonded warehouse; calculating and updating ratesof yield, and on that basis calculating the utilizationof materials in finished products; and producingaccurate accounts of imported materials, goodsproduced, and goods exported.

The facility operating in Bangladesh provides agood example of the revenue risk involved in theduty relief systems and how the risk can beaddressed by establishing computerized customscontrol (see box 10.5).

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BOX 10.5 The Bangladesh Special Bonded Warehouse Facility

In Bangladesh, the Ready Made Garments (RMG)sector is significant and relies heavily on the use ofthe special bonded warehouse (SBW) facility. Rawmaterials used in the production of RMG prod-ucts are imported duty-free into SBW, manufac-tured into finished articles of clothing, andexported. There are some 3,400 SBWs, locatedmainly in Dhaka and in the Chittagong port area.Another, approximately 700, backward linkage orsupply industries operate a different kind of ware-house and supply inputs, such as packing, thread,embroidery, and labels to the RMG export trade.These supplies are treated as exports.

The Commissioner of Customs, following theapproval of the facility and the posting of a bondthat must cover the duty liability on the goodswarehoused, issues licenses to the SBW. Thebonder is issued passbooks, one for the bondoperator, and one for customs at the port ofimport–export for recording goods bothimported into and exported out of the bondedwarehouse. A bonder can import raw materialsduty-free up to 75 percent of the value of thetotal export. At the time of import the bondersubmits a utilization declaration (UD) issued bythe Bangladesh Garments Manufacturing andExport Association, along with other import doc-uments. The quantities imported are recorded inthe bonder’s and customs’ passbooks, which actas a record of stock going into the SBW. There-after, the bonder accepts delivery of the rawmaterials for transfer to the warehouse. Aftercompletion of the manufacture of finished prod-ucts, the bonder presents all documents forexport together with the UD for a second time,

and the necessary export entry is made in thepassbooks. It is the bonder’s responsibility tomatch import accounts with export accounts inthe passbook.

The system is not foolproof and there arereports of significant revenue loss due to illegaldiversion of finished products to the local mar-ket. A recent investigation of a single fraud caserevealed that a bonder had falsified export docu-ments and the entries in the passbook, leadingto a loss in customs revenue of US$3.2 million.

A key component of the customs moderniza-tion project that started in 1999 is to address theloss of revenue created by the operation of theSBW facilities. The main initiatives include cen-tralized management of the SBW facilities,relicensing of the SBW operators (which reducedthe number of licenses by 20 percent), and theelectronic tracking of the goods using theASYCUDA++ computer system. This enables cus-toms to retrieve accurate accounts of totalimports and exports of any individual SBW oper-ator and to reconcile the movement of goodsinto and out of a bonded warehouse, reducingits reliance on the passbook system. In thefuture, this reconciliation is expected to benefitfrom a new software program that takes theASYCUDA++ import and export data and usesthe UD formula for calculating the utilization ofraw materials to finished articles, thus automati-cally tracking the goods flow and highlightingpotential inconsistencies.

Source: Thomas, January 2003. Note pre-pared for this chapter. World Bank staff.

Drawback

Drawback is the refund of import duties and taxespaid on imported materials that are used in themanufacture of goods that are then exported.7

Drawback is not an export subsidy and is compli-ant with WTO rules insofar as the refund does notexceed the amount of duties and taxes paid onimportation of the materials.8

Issues Drawback is in operation in many coun-tries, usually along with one or more systems thatare based on temporary admission. While the prin-ciple of drawback is the same everywhere, there aresubstantial differences among countries in the scopeof drawback allowed, and in the administrative rulesand procedures by which the system operates and isimplemented. In some countries drawback seems tobe considered as a privilege or a benefit to theexport manufacturer, rather than the refund of whatshould not have been charged in the first place. Thisis reflected in the kind of problems experiencedwith drawback schemes in various countries, whichmay include some of the following:

• The categories of goods that qualify for drawbackare restricted to encourage the use of domesti-cally produced equivalents of the importedgoods. This handicaps the competitiveness of theexporter.

• The exporter is not given full relief of the dutyburden because not all import-related taxes areincluded in the system, or refunds are made onlyup to a given percentage of what was paid. Anexample of restricted access to drawback is theIndian drawback scheme, which covers onlythose products included in an exhaustive list and

permits refund only for the central governmentduties and not of the state taxes and dutieslevied on the inputs.

• Processing or service fees reduce the drawbackat times. For instance, Tanzania used to charge aprocessing fee of 4 percent of the refund.

• Bureaucratic requirements, ill-conceived proce-dures, or inefficient customs administration (orall three) result in undue costs to the exporterthrough delays in the payment of the refund,service charges, or other direct or indirectadministrative costs.

• Payment delays often are excessive, or paymentsimply is not made, a problem occurring partic-ularly in countries where refunds are to be madeout of a special annual budget line for drawback.When payments are finally made, inflation mayhave substantially reduced the value of thedrawback payments, thus increasing theexporter’s already high cost of financing theduties, and reducing its working capital. Forinstance, before Tanzania reformed its system afew years ago, substantial arrears in drawbackrefunds had accumulated due to both an inade-quate budget for drawback and excessive docu-mentary requirements. Similar problems prevailin Nepal, India, and several African countries.9

• Excessive documentary requirements also con-tribute to delays in refunds, and add costs to theexporter (and customs). Some countries requirethe drawback claim to be supported not only bythe export entry and invoice, but also by the billof lading, the landing certificate, proof of exportproceeds, and import entries concerning theinputs for which the duties were paid. Apartfrom the fact that most of these documentsshould play no role in the routine processing ofdrawback claims, they are a major source ofdelay because it may take the exporter monthsafter exportation before being able to producesome of them.

Duty Relief and Exemption Control 225

7. Some countries use the term “drawback” for the refund ofduties paid for any goods imported and subsequently exportedwithout undergoing processing. The appropriate customs termi-nology for such refunds is simply “refund.”

8. Some countries have applied a flat drawback rate per categoryof products. In this case, the refund will normally not equal theamount of duties paid on the imported inputs, because technicalinput/output coefficients, prices of inputs, and duty rates varyfor each specification of export product. If the amount is toolow, the exporter does not receive full relief of the duty elementin the export products. If it is too high, the drawback contains anelement of subsidy and does not comply with WTO rules. Kenya,Bolivia, and Colombia used to apply a flat duty drawback rate.In Bolivia, a flat rate of 10 percent of the export value was inplace until about 1990. The drawback system has been reformedsince then.

9. Tax Notes International reports that the Nepalese govern-ment’s delays in duty drawback hurt the country’s export indus-try. Business opportunities have been lost as a result of the fail-ure of the Revenue Committee to refund the duties. Thegovernment allocated only NPR 200 million (about US$ 2.8 mil-lion) for duty drawback, despite estimates that the total dutyrefundable at the end of the year would exceed NPR 1 billion(about US$ 14 million) (Tax Notes International 2001a, p. 76;2001b, p. 168).

The absence of a well-designed drawback system,or the inability of the customs administration toproperly implement one, is frustrating and discour-aging for exporters and may make duty and taxevasion more tempting. The following summarizesprinciples and guidelines for the design and admin-istration of an effective drawback system.

Determination of Drawback Rates The determi-nation of drawback rates involves the following:

• The setting of drawback rates should be theresponsibility of a high-level committee, whichshould normally consist of industry, trade, cus-toms, inland revenue, and possibly other gov-ernment departments.

• Drawback rates should be based on calculationsof the duties on imported inputs incorporatedin one unit of output. The amount to berefunded should equal the sum of inputs timestheir tariffs, for a given unit of exports. A certainamount of aggregation may be possible insetting drawback rates. For final goods thatconvert inputs according to a standard formula,product rates or fixed rates can be set. Wheninput–output ratios vary, individual rates aremore appropriate.

Under the fixed rate system the refund is calculatedaccording to a set schedule for each exported goodbased on input–output coefficients. This providesease of administration because it uses automaticrates of drawback not related to the specificperformance of the manufacturer. However,it requires the frequent updating of the input–out-put coefficients. Korea and Taiwan use this systemand publish updated drawback schedules every sixmonths.

Under the individual rate system the drawbackis based on the manufacturer’s performance, veri-fied by audit of the books and records of the enter-prise. This system relies more heavily on self-assess-ment, because the manufacturer is responsible forestablishing rates of yield or conversion ratios toclaim drawback. It is the responsibility of theadministration to verify the yields or conversionrates through audits. This approach is fair to allmanufacturers because it relates specifically to theperformance of an individual company and is notbased on an industry average. Most industrialcountries use this system.

Guiding Principles for Drawback Design Thefollowing principles should be followed in design-ing a drawback system.

• Duty relief should be complete (100 percent ofall duties and taxes paid) and rapid. It shouldcover all export products that incorporateimported inputs, as well as all raw materials andintermediate goods used for the production offinal exports, including imported packaging.Refunds should not exceed the duties actuallypaid, ensuring consistency with WTO rules.

• The system should be simple, easily understoodby manufacturers, and easily administered bycustoms. It should operate at minimal cost tothe exporter. This implies that the exporter isnot charged any special service fee for obtainingdrawback; the refund is immediate or within afew days after exportation; and the documentaryrequirements are minimal, while protecting rev-enue from abuse and fraud.

• The export declaration should be taken as suffi-cient proof of exportation, and no other docu-mentation should routinely be required. Draw-back should not depend on proof of exchangereceipts, but on the simple fact of exportation. Ifquestions of underinvoicing or other fraudulentpractices need to be addressed, this should notbe done through the drawback system, butthrough other appropriate control methods.

• The scheme should include both direct andindirect exporters, that is, the refund shouldreflect all duties and taxes paid on the importedmaterials that have been incorporated into theexport product, whether paid by the exporter, orby other traders from whom the materials werepurchased.10

• Exporters should be accountable for revenuelosses resulting from failure to inform the cus-toms drawback unit of changes in the factorsunderlying the drawback rate.

• Customs should publicize and maintain per-formance standards in administering drawbackand, in particular, commit itself to paying draw-back within a set number of days following thereceipt of the drawback claim.

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10. This is done for instance, in Korea, Chile, and Colombia, butit is not the case in many countries.

Operational Guidelines The main operationalguidelines for a drawback system follow:

• The drawback system should be the subject of aregulation that would set out the principles andthe main legal, administrative, and proceduralrequirements. Customs should provide furtheruseful information to drawback users throughinformation leaflets or seminars.

• Claiming drawback and paying the amount ofdrawback should require only a simple proce-dure with minimal documentary requirements.The claim can be made on the same form as theexport declaration or on a separate form. Pay-ment should not be delayed until all controls arefinalized. Once customs has certified the expor-tation of the goods on the basis of the exportentry, the drawback should be paid, with verifi-cation of the validity of the claim afterward. Insituations where delays are unavoidable because,for example, the drawback rate has yet to bedetermined for a product at the time it isexported, a provisional payment should bemade, perhaps 80 percent of the amountclaimed by the exporter, subject to the necessaryadjustment when the rate is determined.

• The drawback can be paid in cash, check,electronic fund transfer, or in the form of acredit certificate or voucher, which could beused for paying duties on the next import con-signment. If the voucher is not sufficient to paythe duties and taxes on the next import, the dif-ference is paid in cash. The advantage of thevoucher system is that it is simple to operate,not disruptive to government accounts, and lessconducive to corruption. (Such a system is inoperation in Brazil.) If payment is made incash, the budget for paying drawback should beset high enough to satisfy all drawback claims,and procedures should be streamlined to avoidlengthy delays.

• The option to claim drawback and receive pay-ment periodically should be made available forexporters that have a large number of drawbackclaims on a regular basis. This simplifies thework for both the exporter and customs.

• Control of the amount of drawback should bemade after exportation through periodic auditof the books and records of the manufacturer.There may be benefit in periodically coordinat-

ing audit for drawback with audit for value-added taxes (VAT).

• A dedicated technical unit at customs headquar-ters needs to be established to monitor and auditthe manufacturing companies approved underthe system and audit drawback claims. Aselected number of staff need to be trained inthe audit for drawback.

• The drawback formula should be periodicallyreviewed to take into account changes in the fac-tors underlying the drawback rate (changes ininput–output ratios, import prices, and dutyand tax rates).

• Drawback control should be automated througha module or program especially developed formanaging the drawback system, using the exist-ing customs computerized system (for instance,similar to the Fiji solution for TAP manage-ment—see box 10.2).

Export Processing Zones

EPZs are geographical enclaves established outsidethe country’s customs territory to encouragemanufacturing for export and to provide services toforeign enterprises.11 The objectives for establishingEPZs in general are to promote exports of non-traditional manufactured goods, strengthen thecompetitiveness of exporters, attract investors,diversify the economy, create employment, transfertechnology, and achieve development and growth.12

Issues In EPZs, enterprises can import raw mate-rials and components without payment of importduties and taxes. In addition, they enjoy severalother advantages, which may include exemptionfrom sales taxes, excise duties, and profit taxes;exemption from industrial regulations appliedelsewhere in the country; benefits relating to laborregulations, foreign exchange, and others; and

Duty Relief and Exemption Control 227

11. Export processing zones have been given a variety of namesincluding Free Trade Zone, Duty Free Zone, Tax Free Zone, andFree Export Zone.

12. Historically, free zones were originally established to facili-tate entrepot trade focusing on commercial, warehousing, andrepacking operations, and not for export manufacturing. Pre-sent day examples of such free zones are the Miami free tradezone, which acts as a distribution center for European and Asiancompanies exporting into South America and the Caribbean,and the free zone of Colon in Panama, which is concernedalmost exclusively with entrepot trade.

provision of infrastructure. These benefits are sub-ject to the condition that the manufactured prod-ucts are exported, and that all the imported inputsare either used in the zone or are re-exported. Insome countries, sale to the local market of a part ofthe output is allowed.13

In recent years, with the shift of emphasis fromimport substitution to export-oriented industries,many developing countries have been attracted toestablishing EPZs, and their use has proliferated.However, experience has shown that only in a lim-ited number of cases has the establishment of EPZsbeen successful in promoting exports.14 Many ofthese zones have proved to be poor investments as aresult of unwise location, high investment costs,inadequate management, or, more profoundly,because the economic policy environment withinthe country was not conducive to efficient produc-tion for export.15

EPZs are usually restricted to a designated indus-trial estate; but in some cases, and recently more so,factories outside the restricted area have beenapproved as single factory zones.16 Leakage of EPZgoods to the domestic market without duty pay-ment has been frequently reported by developingcountries. This has been the case especially wherethe EPZs are not well separated geographically fromthe regular customs zone, and where several singlefactory zones exist, making it difficult for customsto organize control over what enters and exits eachof these zones. Unless the EPZ enterprises keep

books and accounts properly and are mostly taxcompliant, and customs has the capability to relymainly on accounts-based controls, diversion ofEPZ goods to the domestic market is bound to be aproblem, with revenue loss as a result.

Customs Administration of Export ProcessingZones For application of the customs law, EPZsare located outside the customs territory, althoughthey are physically located within the nationalboundaries and are part of the national economy.EPZs, therefore, require customs to arrange for twotypes of customs control.

First, with respect to the movement of goodsfrom the EPZ to the local market and vice versa, theEPZ has to be dealt with like a foreign country. Cus-toms posts need to be established on the roads fromthe zone to the rest of the country to ensure that therelevant customs laws are properly enforced.Imports from the EPZ into the local market, ifallowed, need to be dealt with like imports fromabroad. Deliveries of goods from the domestic mar-ket to the EPZ need to be dealt with like exports.Customs surveillance needs to be established, toprevent incidents where goods imported or manu-factured in the EPZ enter the local market fraudu-lently. Insofar as the EPZ is a geographicallyenclosed area, all this should not establish majordifficulties for customs, because this is all part andparcel of normal customs operations. However, thesituation is different when the EPZ is not well sepa-rated geographically from the regular customs area,and especially when it comes to single factoryzones. As mentioned above, single factory zones aredifficult to police.

Second, with respect to imports into and exportsout of the EPZ, customs documentation is requiredfor control and statistical purposes. One of the maincharacteristics and conditions for smooth operationof the typical EPZ is streamlined administration.This includes streamlined customs documentationrequirements for imported raw materials andcapital goods and exported final products. In coun-tries where customs administration is not up tomodern standards, the customs documentaryrequirements in connection with EPZ trade mayinterfere with its smooth operation. To solve thatproblem, a separate administrative branch has oftenbeen created to mediate between EPZ firms and thegovernment, with the purpose to reduce zone firms’administrative costs and to prevent unnecessary

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13. For instance, in Mauritius, Israel, Syria, and the UnitedStates.

14. Mauritius is probably the best example of a successful EPZ.Other successful cases are the Republic of Korea,Taiwan,Malaysia,and the Dominican Republic.

15. For an analysis of the role of EPZs in promoting manufac-tured exports see, for instance, Madani 1999. Madani concludesthat EPZs have limited applications and that general liberaliza-tion of a country’s economy is a better policy choice. See alsoWarr (1989). Warr concludes that the experience of East andSoutheast Asia confirms that the role of EPZs in promotingmanufactured exports is at best minor, and that the most effec-tive means of promoting exports is to ensure that the economicpolicy environment within the country is conducive to efficientproduction for export.

16. This is the case in Fiji, Korea, Mauritius, Mexico, Senegal, andthe United States. In Senegal, the single factory regime wasintroduced in 1991, but due to a wave of applications, approvalswere suspended in 1992, and the regime became fully effectiveonly in 1993. The government explained the suspension anddelays by the difficulties of customs control and, more specifi-cally, by the tax losses that would be incurred if existing enter-prises were approved under the EPZ system. By 1995, eightsingle factory zones were operating.

delays in their operations. However, as pointed outby Warr (1989), the degree to which these bodies areempowered to act on behalf of the governmentvaries, but other departments can resent interfer-ence with their “normal” functions and becomeuncooperative with the zone bodies. The experiencewith the arrangements in Jordan’s Aqaba exportprocessing zone illustrates some of the difficultiesthat, for instance, the creation of a separate customsagency for the zone can create. (See box 10.6.)Instead, the recommended arrangement is to giveresponsibility for customs functions relating to theEPZ operations to an autonomous or semi-autonomous division under the umbrella of thenational customs service.

Other Administrative Issues and Guidelines Ifsales in the local market are provided for in the

regime, they should be limited to wholesale trans-actions. It would be impossible for customs toeffectively control retail transactions.

If there is no adequate customs capability forauditing manufacturer’s accounts, single factorieslocated outside the EPZ enclave should not begranted EPZ status. However, such factories couldpossibly qualify for the MUB regime.

Conclusions and Guidelines for Duty Relieffor Inward Processing

From both a tax policy and administrative point ofview, the first best practice for providing exportermanufacturers access to industrial inputs at worldprices is to have a zero tariff. In the presence of tar-iffs, the best system is the one that relieves exportmanufacturers from duty payment, fully and at the

Duty Relief and Exemption Control 229

BOX 10.6 Customs Administration of the Aqaba Export Processing Zone

The government of Jordan established theAqaba Special Economic Zone at the Red Seaport of Aqaba in January 2001 to enhance eco-nomic capability in the Kingdom by attractingdifferent economic activities and investmentsthereto. The zone began operations under theadministration of the Aqaba Special EconomicZone Authority (ASEZA). The zone has clear bor-ders of its own, and to that extent is a territorythat has been separated from the national terri-tory of Jordan. ASEZA is empowered to make itsown laws to apply within the zone, and is specif-ically granted authority relating to customs pro-cedures. As a result, there are two separate cus-toms authorities operating in ASEZA: theNational Jordanian Customs, which retainsresponsibility for administering the Customs Lawof Jordan to the extent that it applies in thezone, and the customs agency within ASEZA,which is responsible for administering ASEZA’scustoms regulations.

The two agencies have very different cultures.The National Customs is a long-establishedorganization with a focus on ensuring thatJordan’s borders are properly protected. It has acontrol-based approach to the clearance ofgoods, transport, and people. Its staff consistslargely of long-serving uniformed officers with atraditional view of customs processing. TheASEZA is new, and is staffed largely by young tal-ented graduates who are committed to thedevelopment of the zone, and are impatientwith process. They are keen to see the traditionaltransactions-based approach of the National

Customs replaced with a more contemporarypost-transaction, audit-based approach.

The existence of two customs agencies wasdifficult to manage. It is also not consistent withthe Revised Kyoto Convention, and the resultingpractices do not deliver the simplified proce-dures promoted by the Convention.

Specific difficulties include the following:

• Zone operators have to deal with two agen-cies with separate headquarters and facilities.

• While both have access to ASYCUDA, the twoagencies’ systems do not communicate, andthere is a failure to share information.

• Different procedures apply, depending onwhich agency is involved in the transaction.

As a consequence of these difficulties, thereare the following concerns:

• Legitimate traders are not receiving the appro-priate level of service necessary to attractinvestment to the zone; there is duplicate doc-umentation, and no “one-stop-shop.”

• Fraudulent traders are exploiting the per-ceived lack of controls and there is a height-ened risk of revenue leakage through inade-quate management of goods moving in andout of the zone to and from national territory.

In view of these difficulties the Jordanian author-ities are considering integrating some of thefunctions of the two organizations.

Source: Harrison, Mark. 2003. Note preparedfor this chapter.

least cost. Thus, the best options are systems that donot require payment or advance payment of importduties on the inputs, and that involve no, or onlyminimal, paperwork and no more than the routineformalities as applied to all imports.

However, in real life, some administrative cost isunavoidable. Customs administrations are alwaysfaced with the possibility that not all importers andexporters are fully tax compliant. Therefore, safe-guards against abuse and evasion are needed. Indesigning systems, procedures, and safeguardsfor the implementation of duty relief systems,countries can take into account the standards andguidelines stipulated in the Revised Kyoto Conven-tion, and incorporate these in the country’s laws,regulations, and administrative procedures, in linewith specific country circumstances.

The recommended practice for any particularcountry depends on both tariff level and structure,and administrative capacity. For countries with anefficient and modern administration, in particularfor countries with the capability of accounts-basedcontrol, the temporary admission for inward pro-cessing under any of its forms (TAP, MUB, and EPZif economically appropriate) should be available toreliable companies. Drawback should also be avail-able, especially where the government fears toomuch revenue risk in relation to temporary admis-sion regimes, as well as for all cases in which, forone reason or another, the duties have been paid onimportation of the materials when their use inimport processing was not anticipated.

Countries with only limited control capabilitiesmay have to rely mainly on drawback, but TAPfacilities should be provided to companies that arein good standing with respect to their fiscal obliga-tions. Duty relief should be provided in all cases inwhich the interest of revenue can be reasonablywell protected, while making all efforts to facilitatetrade operations. The customs administration’saccounts-based control capabilities should be fullydeveloped and temporary admission for inwardprocessing gradually should become the mainmethod for duty relief.

Warehousing, TemporaryAdmission, and Transit

This section reviews the customs regimes underwhich goods are imported with suspension of dutypayment for reasons other than inward processing.

This includes customs warehousing, temporaryadmission for re-exportation in the same state, andtransit.17

Customs Warehousing

Customs warehousing is the procedure underwhich the importer stores the imported goods in awarehouse under customs control, without pay-ment of import duties and taxes, until the goods aretaken into home use, or until the goods are re-exported, in which case no duties are payable. Thecustoms warehousing procedure is available in vir-tually every country.

Issues This regime provides valuable facilities tothe trading sector; but if it is not administeredproperly, there may be costs that are too heavy tothe owner of the goods, or the government, orboth. This is especially so where customs still reliesheavily on physical controls.

The establishment of proper control over cus-toms warehouses to prevent evasion and revenueloss through leakage of warehoused goods to themarket without duty payment, has at times gonebeyond the capability of some customs administra-tions. This results from a multiplicity of ware-houses, inadequate documentary follow-up, poorprocedures, and generally weak administration. Forinstance, faced with rampant abuse and evasionand resulting revenue losses, as well as the inabilityof its customs administration to establish neededcontrols, Tanzania saw no better solution than clos-ing down virtually all customs warehouses during1997–98.18

Economic Rationale Customs warehousing facil-itates import trade. When imports are intendedfor home consumption, the procedure allows theimporter to delay payment of duties and taxes untilthe importer actually clears the goods for homeuse. When the importer decides not to clear the

230 Customs Modernization Handbook

17. The standards and guidelines of the Revised Kyoto Conven-tion with respect to the duty relief regimes are included inthe Convention as follows: customs warehousing: SpecificAnnex D.1; temporary admission: Specific Annex G.1; transit:Specific Annex E.1. Customs warehousing is often referred to asbonded warehousing.

18. The bonded warehousing regime was made available againshortly thereafter, but the number of warehouses was drasticallyreduced and the control system improved.

goods for home consumption but to re-exportthem, perhaps because market conditions havechanged, the importer obviates the need to pay theduties. The goods can also be given another cus-toms destination, such as TAP. Bonded warehousesare also used to store goods that are domesticallyproduced under TAP or MUB, or that are subject toexcise duties. Such storage clears the duty liabilityon these goods from the time they are warehoused,provided actual exportation follows. For drawbackproducts, storage in the customs warehouse trig-gers the refund.

Another advantage for the importer or owner ofthe goods is that certain operations are allowedduring storage, including inspecting and samplingof the goods, packing and repacking, and otheroperations aimed at improving the marketability ofthe goods.

Requirements for Effective and Efficient Adminis-tration The customs department must be satisfiedthat the goods can be stored in the warehouse with-out serious risk of loss due to theft, diversion, andother problems, and that the agency operating thewarehouse takes responsibility for the safe custodyof the goods. Customs must also be certain that theprocedure for transferring the goods from the cus-toms warehouse for exportation (which cancels theexporter’s liability to pay duty on the goods) or forclearing them for home consumption by payingduty is adequate. The administrative requirementsmay differ substantially according to the risk offraudulent removal or substitution of goods. In gen-eral, requirements may include the following:

• customs approval of the warehouse—amongother things, the warehouse needs to have rea-sonable structural security and safe access

• double-locking of the warehouse (warehousekeeper and customs)

• permanent or intermittent supervision• unannounced spot checks • keeping of stock accounts• periodic inventory• financial security, although this may be waived if

there is no special revenue risk and if customscontrol can be adequately exercised.

Traditionally, warehouse control has relied heavilyon physical control, typically involving the sta-

tioning of customs officers at licensed premises.The officers exercise control over warehousedgoods; supervise a range of commercial activities,including the movement of all goods entering orleaving the warehouse, and the stuffing andunstuffing of containers; and authorized opera-tions such as sorting, packaging, and conditioning.The control system often includes a requirementthat customs locks the warehouse in the eveningand reopens it the following morning. In addition,without the physical presence of customs staff, nocommercial activities are allowed to be carried out.The warehouse operators are charged for the cost ofcustoms supervision, including officers’ salaries,overtime, and the provision of appropriate on-siteaccommodation and equipment.

Many countries, both Organisation for Eco-nomic Co-operation and Development (OECD)and developing countries, have moved from physicalcontrol arrangements (closed bond arrangements)to documentary and accounts-based systems forcustoms warehouse control (open bond arrange-ments), thereby improving the efficiency of ware-house operations and reducing the cost of bothregulation and compliance. For example, the prac-tice of physically controlling bonded warehouseswas terminated in Australia in the late 1960s, and inthe United States in the early 1980s. Following theintroduction of its new approach to warehousecompliance, the U.S. Customs Service announced

The Customs Regulations were amended in1982 . . . to replace physical supervision by Cus-toms with the audit-inspection supervisionmethod. Through this change, Customs reducedreimbursable costs to proprietors from $8 mil-lion to $2 million annually, and allowed muchmore flexibility in warehouse operations. . . Atthe same time, the change saved taxpayersalmost $2 million annually in customs costs andreduced the number of customs officers neededto supervise warehouses from about 300 toabout 50. (U.S. Customs Service 1996, p. 2-1).

Following Hong Kong’s lead, Thailand introducedan open bond arrangement in 2002. (See box 10.7.)

Temporary Admission

Temporary admission is the customs procedurethat provides for full or partial relief from import

Duty Relief and Exemption Control 231

duties and taxes on goods imported for a specificpurpose, on the condition that they are to be re-exported in the same state. As a rule, the procedureallows for total conditional relief. In certain casesthe relief may only be partial. Temporary admissionis a widely used procedure.

Issues Temporary admission is a relatively simplecustoms procedure. The risk to government rev-enue of allowing the temporary entry of foreigngoods without payment of duties and taxes can bemanaged through proper use of documents andfinancial security for the revenue involved. Never-theless, in a number of less advanced customsadministrations temporary admission has beenabused. This happens most frequently with vehiclesof experts and other personnel visiting the countryfor the duration of project implementation or forother temporary assignments.

Economic Rationale There are various economicand social reasons for allowing goods to beimported temporarily without payment of dutyand taxes. The main categories of such importsinclude goods for display or use at exhibitions,fairs, meetings, and similar events; professionalequipment of persons visiting the territory to carryout specific tasks; commercial samples; containersused in international transport of goods; travelers’personal effects; and vehicles in international traf-

fic. International trade and economic and socialactivities would be hindered if duties and taxeswere to be paid on importation and then refundedon re-exportation. Apart from increasing the costof the activity, it would also complicate customsadministration.

Requirements for Effective and Efficient Admin-istration The conditions and administrativerequirements include the following:

• Temporary admission is granted based on theintent to re-export the goods.

• A declaration for temporary admission needs tobe lodged for importation. However, no declara-tion should be required when there is no doubtabout the subsequent re-exportation of thegoods, regardless of their value (containers, forexample).

• The goods must be identifiable. Customs mustbe able to ensure that the re-exported goods arethe same as those presented at temporaryimportation. Customs may take identificationmeasures if commercial means of identificationare not sufficient.

• Security is required for the duties and taxes thatwould become due if the temporaryadmission conditions are not complied with. Thesecurity may be furnished by an internationalguaranteeing chain, as is the case under the ATA

232 Customs Modernization Handbook

BOX 10.7 Thailand’s Move to Open Bond Arrangements

Thailand’s customs warehousing system is mov-ing from a closed to an open bond system. Thai-land’s Customs Act No. 18 of 2000 provides forthe legal instrument to establish bonded ware-houses. Within the parameters of the law, theCustoms Department has flexibility in adminis-tering the law. Following a government decisionthat required all government agencies tostreamline their services, the Customs PrivilegesBureau has focused on improving the customscontrol of bonded warehouses. The closed bondarrangements, which Thailand has traditionallyapplied to the management of bonded ware-house compliance, was characterized by real-time physical control, with the complianceassessment focus being directed toward individ-ual transactions rather than the broader conceptof a warehouse operator’s systems, procedures,

and controls. The open bond arrangements towhich the Customs Department is moving relyon computer-based controls to replace the phys-ical presence of officers at the premises. Thisincludes a warehouse inventory control systemthat can be connected to the Customs Depart-ment in real time, and the electronic monitoringof incoming and outgoing warehouse goods.The arrangement is reflective of a risk-basedapproach to compliance management, due tothe greater reliance on warehouse operators’self-assessment of their compliance, verifiedthrough post-transaction customs complianceaudits of the relevant systems and procedures todetermine the integrity of such systems.

Source: Ue-srivong, Chintana. 2003. Note pre-pared for this chapter.

(Admission Temporaire-Temporary Admission)system.

• A time limit for re-exportation needs to be set;it should be adequate for the purpose of thetemporary admission, should not encourageabuse, and should be easy to monitor.

• The re-export declaration should refer to theinitial temporary admission document. Securityshould be released provided customs is satisfiedthat the re-exported goods are the same as thoseinitially imported and that all conditions havebeen met.

As with the other customs regimes, follow-up ongoods admitted under the temporary admissionregime can be largely facilitated and improvedwhen customs control is computerized. This is par-ticularly so when re-exportation of the temporaryadmission goods takes place through one or moreoffices other than the office of importation.

Transit

Because chapter 11 is devoted to customs transit,the comments here are limited to identifying transitas one of the duty suspension regimes, highlightingits revenue risk, and summarizing some of themain requirements for effective customs control.

Customs transit is the procedure under whichgoods are transported under customs control fromone customs office to another. When the wholemovement is within the same customs territory,this is referred to as national transit or removalunder bond. When the customs offices are in morethan one customs territory, it is international tran-sit. Customs transit procedures are designed tofacilitate the movement of goods crossing the terri-tory of one or more countries, without jeopardiz-ing customs revenue, which is threatened by thediversion of goods to the local market.19

The transit regime has often been used as ameans for fraudulent importation in both industri-alized and developing countries. Substantial rev-enue may be lost when transit goods are diverted tothe local market fraudulently. The administrative

measures needed for the effective control of transitshipments are straightforward and simple. Never-theless, few developing countries have succeeded inestablishing an adequate control system, due toproblems of infrastructure at the border offices,inadequate systems for securing the suspendedduties and taxes, poor means of communication,and generally weak administration.

The measures needed for customs control overtransit include, among others, restricting the licens-ing of transporters for transit to solvent, reputabletransporters that are in good standing relative totheir tax obligations; strictly monitoring transitshipments through proper documentation; estab-lishing security measures to insure the suspendedduties and taxes; establishing an efficient system ofinformation exchange between the customs officeof entry and the customs office of exit; and takingrapid action if transit shipments are not presentedat the office of exit in the time set for completingthe transit.

Exemptions

Exemptions are exceptions made to the applicationof the ordinary customs tariff.20 They can take theform of a full or partial waiver of duties and taxesthat would ordinarily be payable on imports. Unlikeduty relief regimes, exemptions are unrelated toexportation or re-exportation. They apply to goodsimported for home consumption by certain eligiblecategories of importers, and on condition that thegoods are used for specified purposes.21

Some exemptions are stipulated in the interna-tional conventions to which the country adheres.Others are established at the discretion of thegovernment for a variety of social and economicpurposes. Still others concern imports of a mainlynoncommercial nature, also called traditionalexemptions. For a more detailed classification, seebox 10.1.

Duty Relief and Exemption Control 233

20. The standards and guidelines of the Revised Kyoto Conven-tion with respect to exemptions are included in SpecificAnnex B.3.

21. Exemptions are sometimes confused with zero tariff rates.However, zero tariff rates are of general application to allimporters, while exemptions only apply to selected importers orcategories of importers, to which the government gives preferen-tial treatment for a variety of reasons.

19. To facilitate international transit of goods, standard proce-dures have been established in bilateral and multilateral agree-ments. The main international conventions in this regard are theConvention on the International Transit of Goods (1971) andthe Convention on International Transportation by Road(1975), usually referred to as the TIR convention.

Issues

Exemptions are used to a greater or smaller extentby most, if not all, countries that have a nonzerotariff. Even if it is government policy to make noexceptions to the application of the tariff, the gov-ernment would still grant some exemptions, suchas those stipulated in international agreements—those in the Vienna Convention on DiplomaticImmunities, for example. Exemptions are pervasivein many developing countries, due to these coun-tries’ large inflows of foreign aid that come in theform of development projects and relief goods;misguided policies with respect to investmentincentives; pressures for exemption from numerousentities involved in educational, charitable, and avariety of other social projects; and often, an ill-designed tariff regime. In many countries the valueof exempt imports amounts to over 30 percent ofall imports, and in some cases to over half of allimports.

Economic Rationale

Good economic justifications for exemptions arerare. Most of the time exemptions have been incor-rectly used as instruments for achieving policyobjectives. Apart from causing substantial revenueloss for the government, exemptions create severaldistortions and costs that include destroying thetransparency of the import tariff, creating anuneven playing field for foreign trade operators anddomestic industry, distorting producer and con-sumer choices, and complicating customs adminis-tration.

Economic or Administrative Issues by Category

The economic and administrative implications andissues for the main categories of exemption can besummarized as follows.

Diplomatic Imports This category comprisesexemptions stipulated by the Vienna conventionson diplomatic and consular relations. Exemptionsunder this category usually make up only a smallpart of all exempt shipments in a country. However,several countries have experienced abuse of theseexemptions, particularly in the quantities ofimported goods for which exemption is claimedthat apparently go beyond the needs of the embassy

or mission. Instances of claiming exemption forcommercial shipments have also been reported. Forcustoms, enforcement is difficult as customs hasonly limited authority to inspect diplomatic ship-ments, and investigating suspected abuse may bepolitically sensitive.

Government Imports Historically, many coun-tries have exempted government imports fromimport duties and taxes. In recent years severalcountries have eliminated these exemptionsbecause they found that the disadvantages out-weigh the benefits. It is often argued that there is nobudgetary benefit to the government collectingduties on its own imports because this wouldamount to a zero sum operation. This argumentignores the fact that exempted government importscan be, and often are, diverted to nongovernmentuse, thus creating a route for avoiding the dutiesthat are lawfully due on such imports. In addition,there are administrative costs for customs to verifythat the goods imported under exemption by thepublic sector are actually used for the stated pur-poses. Apart from the budgetary and administrativecosts, exemption of government imports distortsthe prices applicable to the private and public sec-tor and can distort decisionmaking, for instance, onthe appropriate prices to charge for the output ofpublic enterprises such as electricity. Furthermore,exemptions for the government understate the truecost of government expenditure, as they are notscrutinized through the budgetary approval processand, therefore, hide the real cost of governmentoperations. Thus, for the sake of transparency andgood administration, government imports shouldnot be exempt.

Investment Incentives Many countries offer taxincentives, including import duty and indirectimport tax concessions, to attract new investmentsand encourage economic development. The ques-tion of whether tax incentives are a factor in busi-ness investment decisions has been researched anddebated extensively in economic literature, andthere is a virtually unanimous consensus that thesefiscal benefits are not crucial, because other consid-erations commonly weigh more heavily ininvestors’ decisionmaking. (See Zee, Stotsky, andLey [2002] for a more complete discussion of theseissues.) Exemptions are vulnerable to abuse

234 Customs Modernization Handbook

through leakage of the exempt goods to the private-sector gray market, rather than being used in themost useful investments. Exemptions also give riseto unfair competition relative to businesses that donot benefit from such incentives. From an adminis-trative point of view, these exemptions require cus-toms to devote a substantial amount of its scarceresources to exemption monitoring and controlactivities, resources that could otherwise beassigned to more productive uses. Developingcountries, therefore, would be well advised to abol-ish these exemptions in combination with a ration-alization of import tariffs. A simple and transpar-ent import tariff with zero or low rates oninvestment and capital goods is likely to be a morepowerful tool for attracting investors than theprevalence of exemptions.

Foreign Financed Projects Lenders and donorsgenerally do not finance duties on the goods theyimport for use on specific projects, because fundsare intended to be used only on those specific proj-ects and not to be contributed to government rev-enue by way of import duties. Experience in manycountries shows that these exemptions lead toabuse and problems of control. First, the quantitiesof materials and items needed for the projects arenot always properly determined. Even when theyare, it is difficult to control the quantities importedand the actual destination of the goods. Second, theexemption is at times extended to consumer goodsfor personnel employed in the project. In bothcases, exempt items can easily be diverted to usesnot envisaged by the exemption. To protect them-selves against such abuses and the resulting revenuelosses, a number of countries no longer exemptsuch imports, but implement a system whereby theduties and taxes are paid through Treasury vouch-ers. See the section entitled Establishing EffectiveAdministrative Systems and Procedures.

Relief Goods Many developing countries aredependent on foreign aid and the delivery of thataid through nongovernmental organizations(NGOs). Food, medicines, and other itemsimported under foreign aid programs are generallygiven duty-exempt status on condition that they aredistributed at no cost to the needy. However, con-trol over the free distribution is difficult. Whatevercontrol is established often turns out to be inade-

quate. In many cases imported relief goods, espe-cially foodstuffs and pharmaceuticals, are divertedfrom their intended destination and end up beingsold in the market. This is done sometimes byunscrupulous organizations disguised as NGOsthat abuse their exempt status to import goods foruses not related to the exempt justification. Yetanother problem is that, in most cases, customs isnot involved in the verification of the credentials ofthe NGO, or consulted in the agreement betweenthe NGO and the Ministry of Planning, Supply,Cooperation, or whatever other entity is responsi-ble for relief imports. Most of the time, customsappears only at the implementation stage and notat the point where the request is examined and theconditions are established. The abovementionedproblems can be avoided by following the guide-lines in Establishing Effective Administrative Sys-tems and Procedures below.

Imports for Charitable, Religious, Cultural, Edu-cational, and Similar Social Purposes In manycountries the customs law and other laws provideexemptions for goods needed for the operation oforganizations or institutions with charitable, reli-gious, cultural, educational, or similar social objec-tives. Often the Minister of Finance or Customs isburdened with numerous, sometimes illegitimate,requests from schools, churches, cultural, or similarorganizations for exempt importation of equip-ment, motor vehicles, and miscellaneous consumergoods. These exemptions are difficult to controland are often abused through diversion of theexempt goods from the exempt purpose. Economi-cally there is no justification for these exemptions,and they are equivalent to hidden subsidies. Theyshould be eliminated and support or relief for thoseorganizations, if deemed necessary, should be pro-vided in the form of budgetary expenditure, subjectto the usual public scrutiny through the budgetaryapproval process.

Noncommercial Imports Exemptions under thiscategory are generally based on tradition or inter-national practice. They are frequently abused. Forinstance, migrant workers, persons settling or reset-tling in the country, and travelers often attempt tobring in more goods than they are legally entitledto under the exemption allowances. Usually theseare exemptions of minor importance and can be

Duty Relief and Exemption Control 235

administered fairly well, provided customs estab-lishes clear and simple rules and procedures andinforms the public of them.

Rationalizing the Exemption System

Exemptions are difficult to justify economically,have high administrative costs, and tend to beabused. They should be reduced to a minimum andeffectively administered to avoid abuse. No otherexemptions should be maintained other than thoserequired by international agreements and conven-tions, and those for noncommercial imports thathave been exempt traditionally (for example, trav-elers’ and migrants’ goods).

The administrative resources and effort neededto administer exemptions places a heavy burden oncustoms administrations and distracts them fromconcentrating on more productive control, revenuecollection, and enforcement activities. Moreover,customs’ ability to monitor exemptions effectivelyis largely impaired when numerous exemptioncases have to be processed.

If the government cannot fully restrict exemp-tions as recommended above, it should remain onguard against their proliferation. Major causes ofproliferation are (a) the numerous exemptions, assectors, companies, and individuals that are notexempt feel at a disadvantage compared to theirexempt competitors and pressure the authorities toobtain similar preferential treatment; and (b) thediscretionary power granted to the Ministry ofFinance, and often to other ministries, to grantexemptions. Unless the conditions and limits of theexemptions are clearly specified in the law, it maybe hard for the minister to withstand the pressuresfor exemption that are exerted by certainimporters. To reduce the pressure for, and avoidproliferation of exemptions the following measuresshould be in place:

• All exemptions should be provided for in the lawand the conditions for exemption should bespelled out in specific terms, including whoqualifies for exemption, what goods are eligiblefor exemption, and under what conditions. Thiswould eliminate all discretionary exemptionsissued by high officials and organizations.

• Proposals and requests for exemption under theinvestment incentives provisions and foreign

financed projects, made by the investment boardor ministerial agencies, should be submitted tothe Minister of Finance for approval. Theyshould include a list containing the description(and HS code), quantity, and value of the goodsto be imported and a calculation of the revenuecost of the exemption.

Establishing Effective Administrative Systemsand Procedures

For effective administration and control of exemp-tions the following guidelines should be kept inmind.

• Rules. The rules should clearly stipulate theprocesses to be observed in requesting andauthorizing an exemption and in importing theexempt shipments, including documentaryrequirements, time frames, limits on value andquantity, controls at the time of importation,end use conditions, and punitive measures incases of abuse or evasion.

• Request and authorization. The rules shouldcontain complete information about the goodsto be imported for the execution of the project(investment project, foreign financed project,relief goods, imports by institutions with chari-table objectives, and the like). Thus, a list shouldbe appended to the request, showing the correctdescription of the goods, as well as identificationby HS code, quantities, and value.

• Controls at time of importation. This includesverification of the eligibility for exemption, anddetermining that the type, quantity, and valueof the goods are as specified in the exemptionauthorization. Methods must be established tomonitor exempt imports that consist of morethan one shipment and that are cleared throughmore than one customs office. Computeriza-tion can largely facilitate this function,as the Moroccan system example shows (seebox 10.8).

• Checking end use. Customs needs to determinethat the exempt goods are actually being usedfor the intended purposes. This should be donethrough a combination of periodic verificationof the accounts of the enterprise or institutionreceiving the exemption or, where appropriate,through periodic unannounced visits to the

236 Customs Modernization Handbook

plant to physically check whether the end-useconditions are being met.

• Exemption monitoring and control unit. Customsshould establish a monitoring and control unitwith responsibility for overseeing all adminis-trative matters concerning exemptions. The unitshould scrutinize exemption requests; monitorquantities imported by embassies, exempt enter-prises, and institutions; carry out post-importa-tion visits to the enterprises or institutions; andmonitor trends, revenue cost, and other indica-tors by category of exemptions. It should collectthe data on exempt imports and compile statis-tics showing the revenue forgone, and preparepertinent reports for the minister.

• Reimbursement instead of immediate exemption.An exemption control system based on paymentof duties and taxes at the time of importation,and reimbursement of the duties and taxes afterpost-importation verification that all conditionsfor the exemption are fulfilled, was introducedin Mali in 1998 and has been successfully imple-mented since then (see box 10.9).

• Treasury voucher system. This exemption controlmechanism has been introduced in a number ofcountries to monitor exempt imports underNGO and other foreign financed projects, andto avoid the diversion of exempt goods to thelocal market without the required duty pay-ment. Under the system, duties and taxes onproject imports are to be paid on importation,

but payment is made by way of Treasury creditchecks or vouchers issued by the government.Donors and financing agencies are required tomake their project tenders tax-inclusive. Thisrequires careful identification of the type andquantity of goods to be imported, and a detailedassessment of duties and taxes to be coveredunder the government budget for that project. Atax credit is then provided to the donor orfinancing agency in the relevant amount, in theform of credit checks. The credit checks are usedfor the payment of duties and taxes on theimportation of goods covered under the project.The monitoring system is automatic and worksas follows: If the bidder overestimates theamount of taxes, the bidder will probably notget the contract. Conversely, if the bidder under-estimates the amount of taxes and wins the con-tract, the bidder will then be responsible for thedifference between the actual and the underesti-mated taxes, because credit checks will only beissued up to the approved credit amount. Thissystem does not require quantities to be moni-tored. In practice, implementation results havebeen mixed. The system has proven to work welland to reduce abuse and revenue loss in someAfrican countries (Mali and Mozambique, forexample), but has not been successful in someother countries (Benin and Côte d’Ivoire).While the system is technically sound, failure hasbeen due mainly to such factors as private sector

Duty Relief and Exemption Control 237

BOX 10.8 Computer Application for Management of InvestmentProject Exemptions

The Customs and Indirect Tax Administration ofMorocco recently introduced a computer appli-cation for the management of the list of goodsthat are permitted for importation underexempt status in the context of investmentagreements between the government and pri-vate sector companies.

These agreements stipulate the exemption ofimport duties and taxes and value-added tax forall materials, tools, and equipment needed forexecution of the projects, and are valid for aperiod of 36 months. These goods are specifiedin a list attached to the agreement.

The computer application, which can beaccessed via the intranet of the customs

offices responsible for processing the projectimports, allows for continuous online moni-toring of the imports, computerized man-agement of the list of exempt goods, andeasy and automatic detection of casesof excess over the authorized quantities. Itallows the clearance offices to capture theimport data directly, to detect and regularizeonline the imports that are in excess of theauthorized quantities or values, and to con-trol the deadlines for the execution of theprojects.

Source: Steenlandt, Marcel. 2003. Note pre-pared for this chapter.

opposition to rigorous control and the lack ofstrong support by higher authorities. In somecountries where it was introduced at the insis-tence of international organizations, it was notimplemented in a convincing way. On balance,provided there is a real will from the highauthorities to make the system work, it is theonly effective method to eliminate or greatlyreduce abuse and revenue loss through thesetypes of exemptions.

• Embassy imports. For countries experiencingabuse of exemptions under the cover of diplo-matic privileges, the most appropriate actionprobably is to take the issue up with the diplo-matic mission using the proper channel, which

is normally the Ministry of Foreign Affairs. Cus-toms should always request a listing of embassystaff that benefits from diplomatic status. Manycountries agree with the diplomatic missions onannual quotas for the goods most sensitive toabuse, that is, alcoholic beverages and tobaccoproducts. The use of annual import quotas forfuel is also standard in many countries.

Operational Conclusionsand Guidelines

The above review leads to the following recommen-dations and guidelines for customs administration.

238 Customs Modernization Handbook

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

Mali successfully implemented a reform of thereimbursement of tax and customs duty exemp-tions in 1998, doubling customs revenues fromthe importation of petroleum products. Dutieson petroleum products were an importantsource of fiscal revenue. These products wereimported by a small number of companies(around 12), making the management of theprogram feasible.

Three principles of the new procedure wereset forth:

• Full payment of all taxes and duties at thecustoms barrier on the import of petroleumproducts.

• The establishment of a system to quickly reim-burse paid customs duties and taxes to thebeneficiaries of exemptions from duties uponjustification of their right. At the time, thesebeneficiaries included, among others, diplo-matic and consular representatives (ViennaConvention), projects financed with foreignresources (including World Bank projects), andconventions resulting from the Mining Code.

• The affirmed separation of functions between(a) the Customs Offices in charge of assessingthe duties and taxes and (b) the TreasuryOffice in charge of reimbursement.

This new procedure occurs in four steps:

1. At the beginning of each year, the beneficiar-ies of these rights file, at the Societe Generalede Surveillance (SGS) office, the documentattesting to their right to exemption accom-panied by a monthly consumption schedule

for petroleum products. After registration ofthis file, the SGS conveys it to the Ministry ofFinance for certification. Once certified, theSGS enters the rights of the beneficiary intoits information system. The whole registra-tion process takes less than a week.

2. The beneficiaries of the exemptions buy theproducts, paying all taxes at customs. Thereceipts are accounted for as customs revenuesand are entered as state budget revenues.

3. Reimbursement by the Treasury, of the dutiesand taxes paid, occurs on a monthly basis intwo steps:— the issuance of a secure “reimbursement

coupon” by SGS in the name of the bene-ficiary.

— the transfer of the amount owed by theTreasury to the beneficiary’s account, onthe basis of the reimbursement couponand a copy of the invoice. Cash paymentis prohibited. This Treasury expenditure ischarged to an expense account to beadjusted.

4. Each month the Treasury conveys to the Bud-get Department a summary of the reimburse-ment coupons paid by payment authoriza-tion for this expense. On sight of theauthorization, the Treasury adjusts itsaccounting situation, definitively entering theexpense as a budgetary expenditure.

Source: Finateu, Emilie. 2003. Note preparedfor this chapter.

Duty Relief

In designing duty relief policy and administrationthe following guidelines should be kept in mind:

• There are valid fiscal, trade, and economic rea-sons for customs laws around the world to makeprovision for the duty relief regimes discussed inthis chapter. Therefore, policymakers shoulddesign, and customs administrations shouldimplement and administer, these regimes in asecure and cost-effective way for both the userof the regimes and the government. Customsmanagement must understand that such systemsare not subsidies to the exporters, only remediesto allow the user of the regimes (export manu-facturer, warehouse operator, transit enterprise,sales prospector) to operate outside the tariffsystem and to do so at minimal cost to thebusiness. In the presence of tariffs, the competi-tiveness of the export sector and the country’sappeal to foreign investors may depend on theavailability of efficiently operating duty reliefsystems. The government must ensure that it issafeguarded against loss of revenue due to abuse,and that these regimes operate efficiently.

• Customs administrations should adhere to theinternational standards and guidelines for theadministration of the duty relief systems, asincluded in the Revised Kyoto Convention.

• The choice between prior exemption (temporaryadmission systems) and drawback dependsmainly on the capacity and degree of moderniza-tion of the customs administration. Exportmanufacturers clearly have a preference for tem-porary admission as compared to duty draw-back, especially when tariffs are high, wheninflation erodes the duty refunds, and wheninterest rates to obtain working capital are high.However, governments in most developingcountries require customs administrations tofocus primarily on revenue collection rather thantrade facilitation and, therefore, tend to preferdrawback to temporary admission systems. Forcountries with an efficient, modern administra-tion, particularly those with accounts-based con-trol capability, TAP under any of its forms shouldbe the primary method for duty relief. In addi-tion, drawback should be available for casesin which the use of the imported materials ininward processing was not anticipated. Coun-

tries with only limited control capabilities mayhave to rely mainly on drawback, but TAP sys-tems should be available to companies that are ingood standing with respect to their fiscal obliga-tions and that pose little or no risk to revenue. Asthe customs administration refines its accounts-based control capabilities, TAP should becomethe primary method.

• The capacity of the customs administrationshould be taken into account in choosingbetween alternative ways of providing duty relief.In particular, no facilities should be granted thatgo beyond the customs administration’s controlcapability. For instance, single factory zoneslocated outside the geographically separated EPZarea should not be established if customs has noadequate accounts-based control capability. Sim-ilarly, exemptions should not be granted if cus-toms cannot effectively monitor them.

• Customs managers should take all possiblemeasures to ensure that compliance with theadministrative requirements and proceduresunder duty relief regimes entails no more thanminimal costs for the users. For instance, pay-ment of duty drawback should be prompt andthe necessary checking should be done later.Wherever possible, closed bond systems of cus-toms warehouse control should be replaced byopen bond systems, thus eliminating the need topay for the costs of customs surveillance of thepremises.

Exemption

There are good economic and administrative rea-sons for restricting duty exemptions and for main-taining only those required by international con-ventions (such as diplomatic immunities) andthose for noncommercial goods (for example, trav-elers and migrants). Until the redundant exemp-tions are eliminated, customs administrationsshould devote adequate technological and man-power resources to organizing and implementingthe necessary control and monitoring systems.

Other Conclusions

The following conclusions and guidelines are appli-cable to the administration of duty relief andexemption regimes alike.

Duty Relief and Exemption Control 239

• Customs should move from physical controls toselective and periodic compliance checkingthrough post-importation accounts-based audits.Effective use of information technology can sub-stantially contribute to such controls while facili-tating trade. This should be complemented by aconsistently enforced penalty system to deterabuse and fraud.

• Maximum use of computer applications shouldbe made to enable and strengthen duty reliefand exemption control. Functions and activitiesthat should be computerized include the follow-ing: tracking of goods imported for inward pro-cessing; customs warehouse inventory manage-ment; exchange of information and databetween customs offices of entry and exit forgoods under temporary admission and in tran-sit; and the control of quantities and values ofexempt imports under projects involving multi-ple shipments or different customs offices.

• For all duty relief and exemption regimes, clear,simple, and easy-to-understand rules should beestablished and made known to foreign tradeoperators, manufacturers, and, as needed, to thepublic in general. Information notes shouldexplain conditions, requirements, processes, andprocedural steps, and how and where to obtainadditional information.

• Organizationally, customs administrationsshould establish an adequately staffed specialunit for management of the duty relief andexemption systems. This unit should oversee allduty relief and exemption control activities atcustoms, including developing efficient proce-dures; developing operational instruction man-uals; checking the eligibility of importers for thespecial regimes they claim; monitoring the legal-ity and correct implementation of large dutyrelief and exemption projects (foreign financed,NGO, and investment incentives projects);assessing the credentials of importers, manufac-turers, and exporters for the TAP, MUB,drawback, and transit regimes; and compilingstatistics showing trends in, and revenue costsof, exemptions.

Annex 10.A Checklist for Duty Reliefand Exemption Control

For reviewers of duty relief and exemption controlsystems the following checklist should be useful.

• Do exporters have access to industrial inputsat world prices through one or more duty reliefsystems—TAP, drawback, or EPZ (or anycombination)?

• Is the TAP system based on the initial determi-nation of input–output ratios and are theseratios periodically reviewed?

• Is TAP control based on periodic global returnsshowing the goods imported under TAP or pur-chased from other TAP traders, and the destina-tion given to the goods after processing (expor-tation or sale in the local market)?

• Does the drawback system operate through theinitial determination of the drawback rate basedon input–output relationships and are the draw-back rates reviewed periodically to take intoaccount changes in the factors underlying therate, such as type or mix of inputs, or changedinput costs?

• Is the process for claiming drawback simple andwith no requirements other than proof ofexport?

• Is drawback paid immediately, or within nomore than a few weeks after exportation, whileverification is performed periodically in theexporter’s books and accounts?

• Does customs commit itself to paying drawbackwithin a set short time frame?

• Are exporters held accountable for revenuelosses resulting from their failure to signalchanges in the factors underlying the input–output ratios or drawback rates?

• Are drawback rates set by a committee thatincludes representatives from customs, inlandrevenue, industry, and trade departments of thegovernment?

• Are exporters and the public well informedabout the available duty relief systems andhow they operate, and are these systems wellunderstood?

• Has customs organized a dedicated technicalunit to monitor and audit manufacturing com-panies operating under the TAP (or one of itsvariants) or drawback systems?

• Are TAP (or its variants) and drawback controlcomputerized?

• For occasional export processors (manufactur-ers exporting only a limited amount of theirproduction, or simple operations), are simpli-fied TAP procedures in place or do they haveaccess to drawback?

240 Customs Modernization Handbook

Further Reading

Alter, Rolf G. 1990. “Export Processing Zones for Growth andDevelopment: The Mauritian Example.” IMF Working PaperNo. 90/122. Washington, D.C.

Corfmat, François, and Adrien Goorman. 2003. “Customs DutyRelief and Exemptions.” In Michael Keen, ed. Changing Cus-toms: Challenges and Strategies for the Reform of CustomsAdministration. Washington, D.C.: IMF.

International Trade Center UNCTAD/GATT. 1979. Duty Draw-back on Exports. Geneva.

Madani, Dorsati. 1999. “A Review of the Role and Impact ofExport Processing Zones.” World Bank Working Paper 2238.Washington, D.C.

Warr, Peter. 1989. “The Potential for Export Processing Zones:Lessons from East Asia.” Pacific Economic Bulletin 8(1):18–26.

World Customs Organization. 1999. International Convention onthe Simplification and Harmonization of Customs Procedures(as amended). Brussels.

References

Madani, Dorsati. 1999. A Review of the Role and Impact of ExportProcessing Zones. World Bank Working Paper No. 2238.Washington, D.C.

Steenlandt, Marcel, and Luc De Wulf. 2004. “Morocco.” In LucDe Wulf and José B. Sokol, eds. Customs ModernizationInitiatives: Case Studies. Washington, D.C.: The World Bank.

Tax Notes International. 2001a. January 1.Tax Notes International. 2001b. January 8.U.S. Customs Service. 1996. “Bonded Warehouse Manual for

Proprietors, Importers, Customs Officers.” Washington,D.C.: Department of the Treasury.

Warr. P. 1989. “The Potential for Export Processing Zones:Lessons from East Asia.” Pacific Economic Bulletin 8(1):18–26.

Zee, Howell H., Janet G. Stotsky, and Eduardo Ley. 2002. “TaxIncentives for Business Investment: A Primer for PolicyMakers in Developing Countries.” World Development 30(9):1497–1516.

Duty Relief and Exemption Control 241

243

11TRANSIT AND THE SPECIAL

CASE OF LANDLOCKEDCOUNTRIES

Jean François Arvis

TABLE OF CONTENTS

The Principles of Customs TransitRegimes 246

Description of a Typical TransitOperation 247

Major International Transit Procedures:The Transport International Routier 254

Transit Facilitation Institutions 259

Operational Conclusions 263

Further Reading 264

References 264

LIST OF TABLES

11.1 Transportation Costs from Main WorldMarkets for Coastal and LandlockedCountries in Africa 245

11.2 General Provisions Applicable to CustomsTransit as Codified by InternationalConventions 247

11.3 Transit Procedures without FacilitativeMeasures 249

LIST OF FIGURES

11.1 Typical Transit Operation 252

11.2 The Sequence of the TIROperations 256

LIST OF BOXES

11.1 The Genesis of Transit Procedures in theMiddle 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

the country of transit, and to avoid the circum-stance that goods intended for transit are leaked tothe domestic market. Transit procedures should besimple so as not to generate excessive delays andcosts. A poor transit system constitutes a majorobstacle to trade. Many international organizationsand transport facilitation forums have identifieddysfunctional transit procedures as a major cost-increasing factor for landlocked developingcountries.

Based on material prepared by ECORYS N.V. and supported by agrant from the government of the Netherlands.

Customs transit refers to customs procedures underwhich goods are transported through countriesfrom one customs office to the other without payingimport duties, domestic consumption taxes, orother charges normally due on imports. Theseprocedures are intended to protect the revenues of

Transit most frequently refers to road transporta-tion to and from landlocked countries. However, it isuseful to make a distinction between national transitand international transit. International transit refersto crossing national borders. National transit occurswhen goods are transferred within national borders,from the first point of entry in the country to a loca-tion where customs procedures are undertaken (forexample, dry ports or inland container depots). Thetwo types of transit can be combined; in fact, this is astandard situation in many landlocked developingcountries. Imported goods arriving at national bor-ders from transit countries are most often shippedunder national transit to the main economic centers.The basic customs mechanisms are similar in bothcases; however, implementation is easier for thenational transit link.

Most transit takes place between landlockedcountries and countries with access to the sea. Insome instances, transit is simply from one countryto the destination country, and borders are crossedonly once. In other instances the transit shipmentcrosses several borders, as is the case when a ship-ment goes from the Netherlands to Russia, andcrosses Germany and Poland. In other cases thecargo originates and ends up in the same territory,but transits through a second country. For example,commodities destined for the northeastern part ofIndia that originate from other parts of India transitBangladesh, as all alternative Indian routes are muchlonger.1 When available, transit by rail offers a num-ber of advantages, including simpler customs transitmechanisms. Rail transit is widely used in centralAsia and is being rejuvenated in West Africa.

This chapter focuses on international transit. Thefirst section reviews the general principles of transitwhile the second section details a typical transitoperation. The third section reviews existing majortransit arrangements based on the Transport Inter-national Routier (TIR). The fourth section presentsvarious institutions set up to facilitate transit, suchas bilateral and regional agreements. The final sec-tion provides some operational conclusions.

The Case of Landlocked Developing Countries

Customs transit is only one part of a wider transac-tion range that includes many other participants

and procedures—cross-border vehicle regulations,visas for truck drivers, insurance, police controls,infrastructure quality, quality of available transportservices, and the organization of the private truck-ing sector. Even if transit procedures are made effec-tive and efficient, full trade facilitation will requirethat these issues be dealt with, too.

The interdependence of these issues is wellillustrated by the Action Plan issued by the Inter-national Ministerial Conference of Landlockedand Transit Developing Countries (August 2003)that notes, “An integrated approach to trade andtransport sector development is needed that takesinto account social and economic aspects, as wellas fiscal policy, as well as regulatory, proceduraland institutional considerations” (UN 2003 p. 4).These concerns will be returned to in the Imple-mentation Issues section of this chapter. However,the customs component is the principal bottleneckof transit and is a source of major inefficienciesthat affect many activities.

Costs of Transit Operations

The high logistics costs and the many developmen-tal problems faced by the landlocked countries ofthe world can be attributed to their geographicalfate. The importance of the transit facilitationagenda to these countries and to the countries oftransit stem from these circumstances.2 Indeed, outof 31 landlocked developing countries, 16 are clas-sified as highly indebted poor countries (HIPC),while 20 out of the 50 least developed countriesworldwide are landlocked.3 Research conductedby the World Bank and other organizations4

concludes that in typical landlocked countries,transport costs are 50 percent higher than in atypical coastal country, while the volume of trade is60 percent lower. Furthermore, a substantial part ofthe cost may be attributed to border crossing. It is

244 Customs Modernization Handbook

2. Faye and others (2004).

3. The 31 landlocked countries are distributed as follows:Europe—FYR Macedonia, Moldova; Asia/Caucasus—Afghanistan, Armenia, Azerbaijan, Bhutan, Kazakhstan, KyrgyzRepublic, Lao PDR, Mongolia, Nepal, Tajikistan, Turkmenistan,Uzbekistan; Africa—Botswana, Burkina Faso, Burundi, CentralAfrican Republic, Chad, Ethiopia, Lesotho, Malawi, Mali, Niger,Rwanda, Swaziland, Uganda, Zambia, Zimbabwe; SouthAmerica—Bolivia, Paraguay.

4. Limao and Venables (1999), Amjadi and Yeats (1995).1. Lakshmanan (2001).

Transit and the Special Case of Landlocked Countries 245

5. These can include customs documentation processing; immi-gration, insurance, and transit bond procedures; security inspec-tionsandweighstations;phytosanitaryandtrafficchecks. AWorldBank study conducted in July 2000 examined delays at selectedSouthern African border posts. Results showed that, for example,delays at Machipanda (Mozambique–Zimbabwe) amounted to24 hours, 36 hours at Beit-Bridge (South Africa–Zimbabwe),36 hours at Victoria Falls (Zimbabwe–Zambia) and 24 hours atKazungula (Botswana–SouthAfrica).

6. Although not easy to quantify, it is estimated that withinthe Southern African Development Community (SADC)region, border delays cost between US$48 million and US$60million per year in business revenues forgone (IntraAfricaLtd. 2001).

7. Amjadi and Yeats (1995).

estimated that the total cost of crossing a border inAfrica is the same as the cost of inland transporta-tion of over 1,000 miles (1,600 km) or the cost of7,000 miles of sea transport (11,000 km). Thisplaces landlocked countries at a great disadvantage.In comparison, the cost of crossing a border inWestern Europe is equivalent to only 100 miles ofinland transportation.

Table 11.1 compares the costs of importing acontainer into a few landlocked developing coun-tries with the costs of importing the same containerinto the neighboring transit country. In many casesthe costs for landlocked developing countries aresignificantly higher.

The differences in absolute transportation costsbetween countries, as well as the increase in trans-portation costs induced by borders, reflect directtransportation and legitimate fees. However, thesecosts are increased substantially by cumbersomecustoms transit procedures—excessive deposits,mandatory convoys, and gratuities to customs staffand police—without which these transit operationscannot be undertaken.

Transit operations often involve long delays thatsubstantially add to the transportation cost. Forinstance, a recent trade audit for Chad estimated

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

Origin

Destination Country Northern Europe Japan North America

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

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

Cameroon $1,520 n.a. n.a.Central African Republic via

Cameroon $2,560 �68% n.a. n.a.

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

n.a.� not available.TEU � twenty-foot equivalent unit.Note: Percentage refers to the increase in transportation costs for the landlocked country compared to itscoastal country of transit.Source: UNCTAD 2003.

that, the trip from the sea gateway takes as long as amonth, due in large part to procedural delays.5 Theseinduced costs include the financial charges related tothe guarantees, the cost of transport equipment heldup by these transit procedures, as well as the require-ment to maintain high inventories. Poorly function-ing transit operations also increase the vulnerabilityof transported goods to theft.6

Transit procedures in landlocked countries affectexports and imports differently.7 The transit costsare somewhat less for exports than for imports.Exports frequently leave the country without pay-ing any duties, so countries are less worried about

revenue loss, thus making complex controls unnec-essary. Also, exporters are fewer than importers andare better equipped to deal with transit logistics.Therefore, for the most part, customs transit is animport concern.

The Principles of CustomsTransit Regimes

Transit regulation aims to facilitate the transport ofgoods through a customs territory without pay-ment of duty and taxes in the countries of departureand transit. This is in accordance with the destina-tion principle of taxation, which states that indirecttaxes should only be levied in the country of con-sumption. Transit legislation should be provided inthe Customs Code. In the absence of such codifica-tion, transit can be regulated by a binding agree-ment between customs and the different partiesaffected by the transit operation. The core provi-sions for customs transit have been around forcenturies (box 11.1). They include the following:

• sealing of the shipment at the point where thetransit operation is initiated

• providing financial security to customs in thecountry of transit, which will guarantee the

payment of duties if the goods do not leave thecountry of transit

• using an efficient information system that allowscertification that the transit goods have effec-tively left the country of departure so that thesecurity can be released.

Over the years, transit provisions have been cod-ified by a number of international conventions, themost important being the General Agreement onTariffs and Trade (GATT) agreements on transit, theWorld Customs Organization (WCO) RevisedKyoto Convention, and the 1982 Geneva Conven-tion on the harmonization of frontier control ofgoods. Annex E, Section 1 of the Revised KyotoConvention is about transit and focuses in detail onapplicable customs formalities and seals, the essenceof which is reflected in the section of this chaptertitled “Description of a Typical Transit Operation”.Table 11.2 summarizes the key principles derivedfrom these international instruments. The actualcustoms transit regimes across countries varywidely. In many countries and regions the basictransit arrangements, such as guarantees, are poorlyimplemented and greatly penalize landlocked coun-tries. In other countries and regions, national tran-sit provisions have evolved into harmonized and

246 Customs Modernization Handbook

BOX 11.1 The Genesis of Transit Procedures in the Middle Ages

Today’s transit principles and procedures can betracked back to the trading revolution that tookplace in preindustrial Europe in the 12th and13th centuries. Seals, carnets, and guarantee sys-tems were designed at that time in major tradingcenters. Compared to other regions of the world,Western Europe was fragmented politically, witha multiplicity of tolls and charges. The develop-ment of inland transportation between majorcities stimulated creative solutions by the mer-chants and the rulers.

In 12th century southwestern France, thelocal guilds from Bordeaux were worried thatgrain might be exported from the city—where itwas needed—to other inland districts. Therewas, therefore, an export duty, which was differ-entiated according to the relations with the vari-ous “jurandes” of the region. The highest dutywas retained until the arrival note was returnedto the customs of departure with the signatureof the customs of arrival. The carrier kept twocopies, one of which was used to justify the legal

right to carry the goods and to establish their ori-gin. Customs brigades could inspect these notesalong the way. Rapidly, merchants asked for an“acquis à caution” (the expression is still used)system, whereby merchants would purchase anunderwritten guarantee instead of depositingthe duty.

In the Duchy of Milan in Northern Italy, anational transit system was available in the 14thcentury to facilitate the movement of importsinside the territory. Customs officers sealed ship-ments of goods at the main inland gateway ofthe duchy. Carnets were issued and could beproduced at checkpoints during the journey. Atthe final destination, Milan or another city, sealswere broken and duties paid. Local officers of thecentral office in Milan sent the information aboutshipments at the beginning and at the end oftransit.

Source: Adapted from Favier 1971.

regionally integrated transit regimes. The bestworking example is the TIR, detailed in the MajorInternational Transit Procedures section.

Article V of the GATT provides the freedom oftransit and determines that“[t]here shall be freedomof transit through the territory of each ContractingParty, via the routes most convenient for interna-tional transit, for traffic in transit to or from the ter-ritory of other Contracting Parties.” Further, itaffirms that “. . . except in cases of failure to complywith applicable Customs laws and regulations, suchtraffic coming from or going to the territory of othercontracting parties shall not be subject to any unnec-essary delays or restrictions and shall be exemptfrom Customs duties and from all transit duties orother charges imposed in respect of transit, exceptcharges for transportation or those commensuratewith administrative expenses entailed by transit orwith the cost of services” (Grosdidier 2004, p. 16).

The 1982 Geneva Convention covers transit facil-itation and recognizes the importance of transit forthe economic development of countries. It promotesjoint customs processing through the simplification

of customs procedures and the harmonization ofborder controls. It also draws heavily on the Euro-pean experience. Article 10 applies to goods in tran-sit:“contracting parties are bound to provide simpleand speedy treatment of goods in transit, especiallyfor those traveling under an international transitprocedure” (Grosdidier 2004, p. 24). Parties shouldalso facilitate, at the utmost, the transit of goods bycontainers and other vessels that provide adequatesecurity. Articles 4 to 9 posit the harmonization ofcontrol and procedures. Contracting parties arebound to provide staff and facilities that are compat-ible with the traffic requirement (Article 5),organizejoint border processing to ease controls (Article 7),and harmonize documentation (Article 9).

Description of a TypicalTransit Operation

Transit procedures should permit the movement ofgoods from the point of entry, into the customs terri-tory of the transit country, and finally to the countryof destination,without thepaymentof importduties,

Transit and the Special Case of Landlocked Countries 247

TABLE 11.2 General Provisions Applicable to Customs Transit as Codified byInternational Conventions

Category Provisions

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

Customs diligences in transit • Limitation of inspection (especially if covered by an internationaltransit regime such as TIR)

• Exemption from customs duties• Normally no escort of goods or itinerary• No duty on accidentally lost merchandise• No unnecessary delays or restrictions.

In addition, when an international transit regime such as TIR is activeHealth and safety • The TIR regime applies to multimodal transport when some part of

the journey is by road• Flat rate bonds are used for transit goods• No sanitary, veterinary, or phytosanitary inspections for goods in

transit if no contamination risk.

Security offered by the carrier • Declarant to choose the form of security in the framework offeredby the legislation

• Customs should accept a general security from declarants who reg-ularly declare goods in transit in their territory

• On completion of the transit operation, discharge of the securitywithout delay.

Source: UN/CEFACT and UNCTAD 2002.

taxes, and other charges due on importation, andwithout being subject to other import regulations,such as health and safety inspections, applicable inthe transit country. In the absence of streamlinedoperations,the transit procedures can be daunting,assuggested in table 11.3.

Three Key Elements of a Transit Operation

Seals, guarantees, and efficient flow of documenta-tion are the underpinnings of transit.

Seals. There should be a physically secure mecha-nism so that goods present at the start of the transitoperation will leave the transit country in the samequantity, form, and status. The best and easiest wayto guarantee this is for customs to seal the truck8 toensure that goods cannot be removed from or addedto the loading space of the truck without breakingthis seal or leaving visible marks on the loading spaceof the truck. Seals and trucks approved for use in thetransit operation must, therefore, conform to well-specified criteria that guarantee their effective oper-ation and security. New transport seals are understudy and prototypes are already in use. One of theseseals includes a microchip that is activated whenbroken. When activated, these chips transmit a sig-nal, picked up via a satellite network, and send infor-mation to the organization or principal of the sealedcontainer, including information on the location ofthe container. Although the prices of such auto-mated seals are relatively high now, it is expected thatprices will decrease in the coming years. The require-ments for seals in the Revised Kyoto Convention arepresented in box 11.2.

Guarantees. Customs must be given a guaranteeto cover the payments of import duties, taxes, and

other charges due on importation in the transitcountry, to cover cases where goods do not leave thecountry when using the transit procedure. Thisguarantee is used to recover the duties and taxes dueif the transport forwarder does not pay the customsinvoice for these duties and taxes when requested (ifgoods cannot be proven to have left the country oftransit as specified in the transit regulation).

Documentation flow. To control the start andcompletion of a transit procedure, a monitoringsystem for the flows should be operational. This sys-tem could be based on paper documentation that isshipped between the customs post at the exit of thecountry, after validation of the transit transaction,and the customs post that controls the origin of thetransit shipment. Increasingly the transmission ofthese documents is done electronically. When thecopies of the documents match, the transit opera-tion is completed and the guarantee released. Whenthey do not match, the transit procedure is not com-pleted satisfactorily. The payment of the importduties, taxes, and other charges are due, and areincreased by a stipulated fine.

Principal and Guarantor

The principal is the owner of the goods, or his rep-resentative, such as the carrier, which is mostoften the case. The principal initiates the transitprocedure and is responsible for following thetransit procedures—providing guarantees and thenecessary documentation. Companies that wantto act as a principal (or agent) making use of thetransit procedure must be registered; must obtaina guarantee to cover the transit operations; mustuse a transit customs document and bill of lading;must present the goods and declaration at thecustoms offices of departure, transit, and destina-tion; and must be responsible for sealing the tran-sit vehicle.

248 Customs Modernization Handbook

8. For illustrative purposes trucks are focused on; however, thesame applies for other modes of transport, such as wagons,barges, and so forth. In practice, the procedures may be simpli-fied for trains.

BOX 11.2 General Requirements with Respect to Seals

“The seals and fastening shall:

a) be strong and durable;b) be capable of being affixed easily and quickly;c) be capable of being readily checked and iden-

tified;d) not permit removal or undoing without

breaking or tampering without leaving traces;

e) not permit use of more than once, exceptseals intended for multiple use (e.g. electronicseals);

f) be made as difficult as possible to copy orcounterfeit.”

Source: Revised Kyoto Convention, Annex E1.www.wcoomd.org.

Transit and the Special Case of Landlocked Countries 249

TABLE 11.3 Transit Procedures without Facilitative Measures

Documentation Charges Comments

Sea transport

Unloading in port

Inspection and clearanceby customs

Loading of vehicle

Formation of a convoy

Road transport in transitcountry

Controls en route

Customs inspectionupon exit from firstcountry

Border inspections(vehicle)

Transfer to other truck

Customs inspection uponentry in the destinationcountry

Other inspections uponentry into secondcountry

Arrival at destination

Bill of lading

Invoice to determine value,classification, and weightthat permit the calculationof the duties to beguaranteed

Transit declaration

Copy of transit document

Transit declaration(Beginning of a nationaltransit link)

All documents

All

Sea freight

Port charges

Guarantee(deposit)

Convoycharges

Road transportcharges

Transfercharges

Guarantee(deposit)

Costs of damageor loss

Deposit equal to part ortotal amount of duties,taxes, and other chargesdue on importation incountry of departure

Seals applied

Noncompliant withgenerally agreedprinciples, may lead toinappropriate practices

Noncompliant withgenerally agreedprinciples. Transit often isimpeded by a number ofroad checks (police andcustoms) involvingpayments of gratuities

Seals are checked. If thetransit operation can becleared, a copy of thetransit document is sent tothe central customs officeand then the guaranteecan be discharged

Driver’s license andinsurance of vehiclechecked. If invalid, changeof operator needed

Noncompliant withgenerally agreedprinciples. Cargo can bedamaged, lost, or stolen

Deposit equal to part ortotal amount of duties,taxes, and other chargesdue on importation insecond country

Security, health checks,involving several stops.Control of seals

Seals broken; duties paid;guarantee discharged

Source: Author.

A guarantor is a private or legal person whoundertakes to pay jointly and separately with thedebtor (in most cases, the principal) the amount ofduties and taxes that will become due when a transitdocument is not discharged properly. A guarantormay be an individual or firm or other body that iseligible to contract as a legal third person. Normallyit is a bank or insurance company. Guarantors mustbe authorized by customs, which usually publishes alist of financial institutions that are authorized toact as guarantors.

Guarantees

The guarantees acceptable by customs are definedby the regulations of the transit country. Within theopen options of financial securities, the choice is theexclusive responsibility of the principal. A guaran-tee can be provided by a bank (in the form of abond) or as a form of insurance by a guarantor thatcan be reinsured internationally by well-known andreliable insurance companies. Nonguarantee formsof security, such as deposits, may still be in place insome transit countries, although they are obviouslynot recommended. A principal may also be its ownguarantor. This is a common practice for rail trans-port, and grants customs access to more directrecourse mechanisms.

There are two categories of transit guarantee:

• An individual guarantee covers only a single tran-sit operation effected by the principal concerned.It covers the full amount of duties, taxes, andother charges for which the goods are liable.

• A comprehensive guarantee covers several tran-sit operations up to a given reference amount,which is set equal to the total amount of dutiesand other charges that may be incurred withrespect to goods under the transit operations ofthe principal during a period of at least oneweek.

Ingeneral,thecalculationof theguarantee isbasedonthe highest rates of duties and other charges applica-ble to the goods, and depends on customs’ classifica-tion of the goods. The amount covered by the com-prehensive guarantee is 100 percent of the referenceamount. If the principal complies with certain crite-ria of reliability, the amount of guarantee to be

specified to the guarantors may be reduced by cus-toms to 30 percent of the reference amount. In case ofmovement of high-risk goods, customs can beallowed to calculate the guarantee at a percentage thatis related to the risk of nonclearance. Internationaltransit regimes such as the TIR allow for furthersavings.

Customs will only address its claim to the guaran-tor for the full amount if debtors do not meet theirobligations. When goods are unlawfully removedfrom the transit procedure the debtor is deemed tobe one of the following:

• the person who unlawfully removed the goodsfrom the transit procedure

• any persons who participated in the unlawfulremoval of the goods or who were aware orshould reasonably have been aware of theremoval of the goods

• any persons who acquired or held the goods, andwho were aware or should reasonably have beenaware that they had been removed from the tran-sit procedure

• the principal.

If the goods have not been unlawfully removedfrom the procedure, but one of the obligations orconditions of using the transit procedure arebreached, the debtor is the person who breached theobligation or condition.

Applicable Documents and Flows

A transit procedure requires a transport document,a bill of lading, and the transit customs document.The transit customs document can contain fourcopies:

• Copy 1 is validated by the customs office of entryin the country of transit and forwarded to thecentral customs office (CCO) of the country oftransit. This will permit later reconciliationwhen the transit is completed, and will also servestatistical purposes. These documents can betransferred daily.

• Copy 2 accompanies the transit shipment to thecustoms office of exit from the country of tran-sit. This copy will be retained by customs as thebasis document for any succeeding customsdestination—warehousing, importation in free

250 Customs Modernization Handbook

circulation, or inward processing—at whichpoint the fiscal responsibility will be taken overby the consignee.

• Copy 3 also accompanies the shipment to thecustoms office of exit. This copy, after beingcompleted (signed and stamped) by that cus-toms office, is sent to the CCO. The CCO verifiesthe completion of the transit procedure by com-paring Copy 1—which it kept at the start of theoperation—and Copy 3. If Copy 3 is not receivedwithin a period of typically six weeks from thevalidation date of the document, the CCO willinitiate an investigation.

• Copy 4 also accompanies the shipment to thecustoms office of exit. This copy, after beingcompleted (signed and stamped) by that cus-toms office, is returned to the principal or hisagent and gives proof that the procedure hasbeen completed, even before the CCO confirmsclearance of the operation.

In a situation in which the transit operation is notcompleted satisfactorily, the taxes and duties calcu-lated at the initiation of the transit operation wouldbe due from the principal. If only one border iscrossed, this becomes a simple matter—the princi-pal owes the full amount of the taxes and dutiesalready calculated at the outset. When more thanone border has been crossed, a decision needs to bemade as to which duties and taxes are due, that is,the duties and taxes applicable in the country ofdeparture, the country or countries of transit, orthe country of destination. To solve this issue, thetransporters using the transit procedure arerequired to file a notification of border passingwhen they enter a new country of transit and whenthey enter the country of destination. When a tran-sit operation is not completed within a specifiedtime, the customs office of entry will ask everyintended customs office at the borders of the coun-tries of transit and destination whether they havereceived a notification of border passing for thatspecific transit procedure.

Clearance of a Transit Procedure

The clearance of the procedure is formally basedon the administrative confirmation by the CCOthat it has received Copy 3 of the transit customs

document. If this administrative procedure fails,the principal or agent should present Copy 4 ofthe transit document or be offered the possibilityto deliver alternate proof to clear the regulation.Such a request from the CCO should be madewithin six weeks after the validation date of thedocument.

Principals or agents in possession of Copy 4 ofthe transit customs document who do not receiveany request from the CCO within six weeks of thedate of validation can consider the transit proce-dure complete and can close the files.

Principals or agents not in possession of Copy 4of the customs transit document who receive arequest for further investigation on the clearance bythe CCO within six weeks can present alternateproof. Such proof should always include officialstamps and signatures from the customs office ofdestination. One of the following might serve asalternate proof:

• a signed copy of Copy 2 of the customs transitdocument

• a signed copy of the documents of the customsprocedure succeeding the transit regime (con-firming that a customs debt is not related to thetransit procedure).

Figure 11.1 depicts a Legitimate Transit Operation.

Nonclearance of the Transit Procedure

If the CCO cannot formally clear the customs tran-sit document, the nonclearance leads to a customsdebt for the debtor. Although parties other than theprincipal can be debtors, the principal will always bejointly liable.

Where a debt arises due to nonclearance, theguarantor should be informed about such debtwithin a period of 12 months. If customs does notinform the guarantor within the set terms, customscan no longer collect a debt from the guarantor.Further, a debt can only be collected from the guar-antor when the State collector has failed to collectthe debt from the fiscal debtors.

According to international standards, any partysubject to the payment of a debt, as stated in a for-mal decision by its authority, has the right to file

Transit and the Special Case of Landlocked Countries 251

that party’s motivated objections to such formaldecision. Reasons for objection might be alternateproof of clearance; incorrect determination ofvalue, classification, or debt; designation of thedebtor; and so forth. An objection can be filedwithin a certain period (in general, four to sixweeks) after the authority has validated the formaldecision.

The debt that arises from nonclearance of goodsamounts to what would be the total of applicableduties if the products had been declared for freecirculation in the country of departure. In addition,interest and fines may be due. The fines and interestare most often stipulated in the transit regulations.These relate only to the fiscal debt. If nonclearanceis the result of criminal offenses, criminal legislationshould specify a fine schedule. Interest becomes dueon the debt from the date that nonclearance isestablished, or from 20 days after the date of valida-tion of the transit customs document.

Implementation Issues

International experience shows that many develop-ing countries could not develop smooth transit

regimes. There are several bottlenecks to over-come in implementing the previously describedmechanisms.

Availability of guarantees. The availability ofactual guarantees constitutes the bottleneck for cus-toms transit in most developing countries. This dif-ficulty may reflect the immaturity of the financialsystem in the country and the unwillingness ofinternational financial institutions to guaranteetransit transactions in particular countries. For cus-toms, the calculation of the guarantee may be aproblem when the value on which it is based cannotbe determined properly. In developing countries,the carrier tends to provide undervalued invoices tolimit the value of the guarantee (or deposits). Thus,the nondischarge of the security might not be anefficient deterrent of fraud.

Quality of transport services. The quality of trans-port services in the transit country can also be amajor constraint. Large operators are more likely toprovide guarantees for customs and may be eligiblefor comprehensive guarantees. The extreme case isthat of railway companies, which are usually notsubject to deposits or guarantees. Alternatively, as isoften the case in Africa, some guarantee may be

252 Customs Modernization Handbook

Copies 2, 3, and 4 Copy 4

Copy 1 Copy 2

Country of transit

Issueguarantee

Guarantee

• Check seals• Take copy 2

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

Point of departurePoint of entry

Central customs officeinformation systems

Activateguarantee

Discharge ofguarantee

Reconcile copies

If copies not cleared

If copiescleared

FIGURE 11.1 Typical Transit Operation

Source: Author.

available but not at an accessible cost for the averageoperator. Also, the vehicle might not meet the cus-toms requirement for a secure transit.9 Hence, theneed for convoys arises.

Convoys. Customs often suspects—as the resultof experience—the presence of fraudulent practicesin transit operations. In reaction, customs oftenresorts to the use of convoys that accompany thetransit vehicle during the transit trip, accompaniedby police and a customs official. Convoys causedelays as well as additional costs, borne by the prin-cipal, but do not fully eliminate all risk of fraud andcorruption.

Corruption. Transit operations are vulnerable tofraud and extortion because they take place over anextended period of time, over long distances, andoften with minimal supervision. One method toreduce corruption is to ensure that tamper-free sealsare applied. It is also recommended that the transitoperation be concluded at a level higher than theexit station, leading to the importance of creatingthe CCO and ensuring that it is well staffed and itsoperations periodically audited.

Weak enforcement. Independent of the corrup-tion problem, enforcement in transit is not easy,as customs is not in a position to check consign-ments all over the territory. Conversely, otheragencies involved in fighting national fraud areless concerned with transit. In most industrializedcountries, fraud in transit is treated as smug-gling and is subject to heavy penalties, includingseizing of the truck and shipment, as well as finesthat can amount to three times the value of theshipment.

Lack of standard documentation. Because a transitoperation normally involves at least two countries,the use of standard customs forms will facilitate theoverall operation. Standard forms will prevent hav-ing to use new customs forms upon entering a newcountry, which certainly adds to the complexity ofthe operation and causes delays at border crossingpoints. Using standard documentation will also

facilitate the use of information technology forinformation exchange.

Computerization and Information Technologies

A number of developing countries have developeddifferent Electronic Data Interchange (EDI) sys-tems adapted to their needs. Within the variety ofsoftware employed, ASYCUDA (Automated Systemfor Customs Data) has proved particularly popular(see chapter 13). Automation brings a number ofpositive changes for transit operations. Some appli-cations are virtually all-inclusive. For instance, theEuropean Union has developed a New Com-puterized Transit System (NCTS), which is fullycomputerized.

More directly applicable to developing econo-mies, the UN Conference on Trade and Develop-ment (UNCTAD) has developed transit add-ons tothe ASYCUDA. The MODTRS (transit) modulehandles transit documents in conjunction withother modules of the ASYCUDA++ functions. Themodule can be adapted to all types of transit andcan, therefore, electronically handle the TIR carnet.Within customs in the transit country, the systemelectronically informs the exit post of the arrival of ashipment within a plausible time frame. When theexit post closes the transit information, the infor-mation is keyed in and the guarantee is automati-cally released.

In developing transit economies that havebegun implementing EDI, it is likely that the tran-sit operation will not be automated at first. Goodsin transit will enter the country through the maingateway (port or airport), whose transit processeswill likely be computerized according to priority.Most often, they will exit through a faraway borderpost where EDI has not yet been deployed. Yet,transit is likely to benefit from automation as itbrings about a more efficient and centralizedinformation system overall. For instance, even ifthe transit information is sent by traditionalmeans to the CCO, the use of EDI already carries alot of potential (this promise is exhibited byGhana’s expansion of its automated GCNet opera-tions to the border post with Burkina Faso). ASY-CUDA can be adapted to suit the specific needs ofits different users, and it provides customs with avariety of functions that support its activities andincrease its efficiency (box 11.3).

Transit and the Special Case of Landlocked Countries 253

9. If the truck cannot be sealed by customs, customs may con-sider, as an alternate option, limiting transit traffic to specifictransit corridors where each truck carries a special transit signaffixed to it or time limits are set for transporting the goodsfrom the customs office of departure to the customs office wherethe goods will leave the transit country. Customs can then patrolthese special transit corridors and concentrate inspections ontrucks with the special transit signs.

Major International TransitProcedures: The TransportInternational Routier

The previous section describes a set of proceduresspecific to the country of transit. Internationaltransit procedures stipulate the harmonization ofcountry-specific procedures and documentation,as well as an internationally accepted guaranteesystem. Hence, an international regime facilitatestransit further, compared to a chain of nationalprocedures. The Transport International Routier(TIR) is a best practice that sets the standardin this domain and is discussed in detail in thissection.

The TIR Convention: General Principles

The TIR Convention, based on the UN CustomsConvention on the International Transport ofGoods under Cover of TIR Carnets (1960), is notonly one of the most successful international

transport conventions, but also the only existinguniversal customs transit system. In this sense, itserves as a benchmark for any future effectiveregional transit frameworks and deserves adetailed examination.

The TIR Convention allows the temporary sus-pension of customs duties, excise duties, andvalue added taxes (VAT) payable on goods origi-nating from or destined for a third country whileunder transport across the territory of a concretecustoms zone. Such suspension remains in placeuntil the goods either exit the customs territoryconcerned, are transferred to an alternative cus-toms regime, or the duties and taxes are paid andthe goods enter free circulation. The TIR specifiesfive main pillars:

• Secure vehicles. The goods are to be transportedin containers or compartments of road vehiclesconstructed so that there is no access to the inte-rior when secured by a customs seal, so that no

254 Customs Modernization Handbook

BOX 11.3 ASYCUDA Customs Operations in Zambia

Zambia has implemented the ASYCUDA transitmodule between Chirundu at the border withZimbabwe and Lusaka, using the Wide Area Net-work (WAN). This transit system calculates thetotal duties and taxes as the guarantee amount,which is deducted from the bond as security.Once a transit document is processed and sent tothe destination office, the record at the departureoffice remains outstanding and is acquitted onlywhen all items have been fully cleared or havemade an exit at the destination office. The avail-ability of the WAN between the two ports andenhancements in ASYCUDA++ have, respectively,resulted in instantaneous data flow and efficiencyin management of transits.

Transit guarantees. To carry out transit opera-tions, a declarant needs to have a Transit Guaran-tee Account. Transit Guarantee Accounts havebeen set up on the accounting module of ASY-CUDA (MODAAC) by customs for all licensedagents. For the account to operate, the maxi-mum authorized guarantee should be specified.This is the amount from which the suspendedduties and taxes will be deducted as bond tocover the movement of transit goods. Once thisamount is exhausted, no further transits can beprocessed.

Departure office—Chirundu. Submissions of allentries to customs is done through Direct TraderInput (DTI). The bureau is situated within the

customs premises and is managed by a privatecontractor. Chirundu is one of the major entrypoints, with a high volume of traffic. From incep-tion, sufficient DTI terminals were available tocope with business volume. The declarations aresent to a specialized transit declaration desk,which generates a transit document (T1). Whenissuing the T1, the equivalent suspended dutiesand taxes (the bond) is deducted from the guar-antee. With the WAN in place, the T1 is automat-ically transmitted through the ASYCUDA mes-sage manager module (Gateway) to bothChirundu and Lusaka. Finally, the release order isgenerated as proof that the consignment hasbeen released after full compliance with the rele-vant transit requirements.

Destination office—Lusaka. The declarantreports to the transit counter at the customsoffice and files the copies of the documentsissued by the departure office. The transit officerwill access the list, T1, transmitted on the com-puter. The details on the computer are comparedwith the information on the hard copy of the T1.If the information is correct and consistent withthe physical consignment, the T1 is validatedand the status of the transit document ischanged to validated. The bond is then creditedback to the Transit Guarantee Account.

Source: UNCTAD 2003.

goods can be removed or added during the tran-sit procedure, and so that any tampering will beclearly visible.

• International guarantee valid throughout the jour-ney. In the situation in which the transport oper-ator cannot pay for the customs duties and taxesdue, this system ensures that the customs dutiesand taxes at risk are covered by the national guar-anteeing system of the operator.

• National associations of transport operators.National associations control access to the TIRprocedures by transport operators and issue theappropriate documents and manage the nationalguarantee system.

• TIR carnets. This is the standard internationalcustoms document accepted and recognized byall members of the TIR Convention.

• International and mutual recognition of customscontrol measures. The countries of transit anddestination accept control measures taken in thecountry of departure.

In essence, TIR operations can be carried out in par-ticipating countries by a truck operator member ofa national association, with the network of nationalassociations acting as guarantor.

The TIR system has been a success. The num-ber of TIR carnets issued rose from 3,000 in 1952to 2.7 million in 2001. The main reason for itssuccess to date is that all parties involved (cus-toms, other legal bodies, transport operators, andinsurance companies) recognize that the systemnot only saves time but also money, due to its effi-ciency and reliability. The TIR Convention is sim-ple, flexible, and cost reducing, and ensures thepayment of customs duties and taxes that are aresult of the international transport of goods.Furthermore, it is constantly being updatedaccording to the latest developments, mainly con-cerning fraud and smuggling. The TIR is usedmostly in European countries but is also used intransit operations in Central Asia, the Caucasus,the Maghreb, and in some parts of the MiddleEast.

Insurance and Issuance of TIR Carnets

In countries using the TIR, the national guaranteeingassociation is recognized by the customs administra-tion of the country. In most cases it is an associationthat represents the transporters. The association

guaranteespaymentwithinthatcountryof anydutiesand taxes that may become due in the event of anyirregularity occurring in the course of the TIR trans-portoperation. Theamountpayable isamaximumofUS$50,000 for normal carnets and US$200,000 fortobacco and alcohol carnets.The national guarantee-ing association is not a financial organization; there-fore, its obligations are usually backed by insurancepolicies provided by the market. The InternationalRoad Transport Union (IRU) can help nationalguaranteeing associations find such services.

There are three types of carnets, each of whichcontains two sheets for each country of departure,transit, and destination:

• The regular TIR carnet.• The multimodal TIR carnet, which was intro-

duced in 1987, and specifically caters to therequirements of regional and intercontinentalmultimodal transport. This carnet contains anadditional sheet identifying the persons whocompose the transport chain.

• The tobacco/alcohol TIR carnet, which becamean integral part of the TIR Convention in1994.

The transporter should execute a contract with thenational guarantee association, which would includethe obligation to meet all requirements set in the TIRConvention; to return the used TIR carnet after com-pletion of the TIR transport; and to pay any amountof duties, taxes, and other charges on first demand ofthe national guarantee association.

To ensure the security of the revenues, the TIRsystem is only applicable to containers or road vehi-cles with load compartments to which there is nointerior access after a customs seal has secured it. Iftampering does take place, it will be clearly visible.

The Sequence of the Transit OperationUnder TIR Cover

A TIR transport is an international transport opera-tion. It is a transit operation of goods, across one ormore borders, of which only a part of the transit hasto be made by road. The transit operation itselfinvolves the movement of goods from one country(country of departure) to another country (countryof destination), through a third country (transitcountry). All countries involved should be activemembers of the TIR Convention.

Transit and the Special Case of Landlocked Countries 255

The customs office in the country of departureadministers the seals. Both the country of transit andthe country of destination accept the control meas-ures taken in this country. Thus, at customs offices enroute (at border points between countries of depar-ture and transit, and between countries of transit anddestination), only the seals and containing body areinspected. The goods are not inspected unless irregu-larities are suspected. Such spot checks should be theexception. The customs office of the destinationcountry removes the seals and controls the goods.

During this transit process, various steps can bediscerned regarding the issuance of the carnet aswell as the insurance situation. To illustrate thefunctioning of the system, an outline of a TIR trans-port from Rotterdam (the Netherlands) to Moscow(Russian Federation) follows. This procedure is alsodepicted in figure 11.2.

Step 1. TIR Carnet Presented at the CustomsOffice of Departure The truck driver shouldpresent the TIR carnet at the customs office ofdeparture in Rotterdam. Before loading the goods,

customs will check the TIR certificate (stating thatthe loading space of the truck fulfills the require-ment of construction and can be sealed properly bycustoms) and customs will seal the loading spaceafter loading has been completed. The customsoffice of departure will then validate the TIR carnet(put customs stamps on the manifest, and on eachof the sheets for the countries that will be transitedbetween the Netherlands and the Russian Federa-tion, two copies for each of these countries). Cus-toms removes one sheet of the TIR carnet and for-wards this copy to the Dutch CCO. The rest of theTIR carnet is returned to the truck driver, who canleave Rotterdam en route to the exit customs office.

Step 2. TIR Carnet Presented at the CustomsOffice of Exit of the Departure Country TheNetherlands is a Member State of the EuropeanUnion (EU), which is a customs union, so no cus-toms formalities need to be fulfilled at the internalborder between the members. Therefore, thecustoms office of exit of the EU is, in this example,situated at the Polish–German border.

256 Customs Modernization Handbook

Departurecountrynational

association

IRU

Info oncarnet

Insurance

Carnet

Claim duties Claimduties

If copy not cleared

Reconcile copyand clear

Central customs officeinformation systems

Copy 2Copy 11. Issuecarnet.

4. Check seals.Take copy 2.

3. Check seals.Take copy 1.

2. Affixseals.

5. Break seals.Discharge carnet.

Country ofdestination

Country oftransit

Country ofdeparture

Dis

char

ged

carn

et

If no

car

net,

clai

m d

utie

sTransitcountrynational

association

FIGURE 11.2 The Sequence of the TIR Operations

Source: Author.

The truck driver presents the TIR carnet at theGerman customs office of exit in Frankfurt(Odder), Federal Republic of Germany. Germancustoms inspects the Dutch customs seals andwhether the loading space of the truck is still intact.If no irregularities are found, German customsremoves a copy from the TIR carnet and stamps thesecond copy in the TIR carnet. The TIR carnet isreturned to the truck driver, who is allowed to leavethe EU and drive to the Polish customs office at thesame border. German customs forwards the copy itremoved from the TIR carnet to the Dutch CCO.

Copies from the TIR carnet received from thecustoms offices of departure and exit are com-pared at the Dutch CCO. If no irregularities aredetermined, duties are not payable. However, ifthe second copy does not arrive at the CCO, goodsare considered to have remained in the EU and theduties and taxes applicable in the EU become due.The principal of the TIR carnet (that is, the trans-porter) is obliged to pay these duties and taxes. Ifthe principal is not willing to pay or cannot paythese duties and taxes on demand of customs, thenational guaranteeing association must pay thedemanded amounts.

Step 3. TIR Carnet Presented at the CustomsOffice of Entry of the Transit Country The truckdriver presents the TIR carnet to the Polish customsoffice at the Polish–German border. Polish customsinspects the Dutch customs seals and whether theloading space of the truck is still intact. If no irregu-larities are found, Polish customs removes a copyfrom the TIR carnet and stamps the second copy inthe TIR carnet. After completion, the TIR carnet isreturned to the truck driver, who is allowed to leavethe Polish customs office and drive to the Russ-ian–Polish border. Polish customs forwards thecopy it removed from the TIR carnet to the PolishCCO.

Step 4. TIR Carnet Presented at the CustomsOffice of Exit of the Transit Country The truckdriver presents the TIR carnet at the Polish customsoffice of exit at the Russian–Polish border, and theprocedure that took place at the German border isrepeated.

Copies from the TIR carnet are received from thecustoms offices of departure and exit and are com-pared at the Polish CCO. If no irregularities are

found, duties are not payable. If Polish customs doesnot receive the documents or if irregularities areobserved, the duties are payable. Polish customs canturn to the guaranteeing Polish national associationfor payment of the demanded amount. The Polishassociation will then recover this amount from itsDutch counterpart.

Step 5. TIR Carnet Presented at the CustomsOffice of Entry in the Country of DestinationThe truck driver presents himself or herself and theTIR carnet at the Russian customs office at the Russ-ian–Polish border and performs the controls thatwere described for leaving the German exit borderbefore sending the driver and the transit truck toMoscow. This part of the journey is identical to anational transit operation. Russian customs files thecopy it removed from the TIR carnet to monitor theclearance.

Step 6. TIR Carnet Presented at the CustomsOffice of the Country of Destination The truckdriver presents himself or herself along with the TIRcarnet at the customs office in Moscow. Russiancustoms inspects the Dutch customs seals andwhether the loading space of the truck is still intact.If no irregularities are found, Moscow customsremoves a copy from the TIR carnet and stamps thesecond copy in the TIR carnet. After completion, theTIR carnet is returned to the truck driver. The TIRtransport operation is now complete. Moscow cus-toms forwards the copy it removed from the TIRcarnet to the Russian customs office of entry.

The copy of the TIR carnet received from theMoscow customs office at the Russian customs officeof entry is compared to the copy of that specific TIRcarnet in the files of that customs office. If no irregu-larities are found, duties are not payable. However, ifthe second copy does not arrive at the Russian cus-toms office of entry, goods are considered to be in freecirculation in Russia and the Russian duties and taxesbecome due. The principal of the TIR carnet (thetransporter) is obliged to pay these duties and taxes. Ifthe principal is not willing to pay or cannot pay theseduties and taxes on demand of Russian customs, theRussian national guaranteeing association must paythe demanded amounts. The Russian national guar-anteeing association will recover this amount, via theDutch national guaranteeing association, from theDutch principal of the TIR carnet.

Transit and the Special Case of Landlocked Countries 257

Step 7. TIR Carnet Discharged by Customs of theCountry of Destination After discharge, the prin-cipal or holder returns the TIR carnet to the DutchNational Guaranteeing Association. The DutchNational Guaranteeing Association returns the TIRcarnet to the IRU for control and archiving.

Advantages of the TIR System

The TIR system was devised to facilitate (under cus-toms control) to the maximum extent possible, theinternational movement of goods. The system pro-vides transit countries with adequate guarantees tocover customs duties and taxes at risk. TIR is awin–win arrangement between the public sectorand the private sector. The counterpart of the sim-plification of procedures is the exercise of moreresponsibility by the private sector through thenational associations.

For the transport industry the benefits includethe following:

• Goods can move across international borderswith minimum customs interference.

• The delays and costs of transit are reduced.• The documents are simplified and standardized.• There is no need to make customs guarantee

deposits at transit borders.

Customs authorities enjoy benefits, too:

• Duties and taxes at risk during internationaltransit movements are guaranteed up toUS$50,000 (with a higher maximum for alcoholand tobacco).

• Only bona fide transport operators are permit-ted to use TIR carnets, thus increasing the relia-bility of the system.

• Disputes can be arbitrated through nationalassociations (the one in the country of transitand the transporter’s national association).

• The system facilitates customs control and docu-mentation.

• Use of central clearance points allows more effi-cient use of customs personnel.

However, in 1992, the TIR system had been endan-gered by its eastward expansion, especially in theformer Soviet Union, where massive fraudoccurred. A guarantee system that can collapse inthe final leg of the journey is not secure. Fortu-nately, Russian customs reacted to address the issue,aided by a proper tracking system backed byadequate investigation and enforcement mecha-nisms. As a response to this crisis, the IRU devel-oped an electronic backup of the TIR carnets calledSafeTIR that makes tracking easier (box 11.4).

Another reponse to this type of tracking problemis provided by the the Unique Consignment Refer-ence Number (UCR) of WCO. The WCO has beenworking for several years on the implementation ofthe UCR. The UCR has a broader customs purposethan transit; however, it constitutes a consistentinformation system for tracking consignments.Therefore, it can provide a reliable tool for customsagencies willing to facilitate legitimate transit whilekeeping control of the movement of goods in tran-sit. From the carrier perspective, the UCR has anumber of potential benefits, beginning with thefact that a single UCR is created and used by theexporter irrespective of the number of transit coun-tries (box 11.5).

Experience also shows that the TIR mechanismsremain difficult to implement in some countries forthe same reasons that make a national-based systeminefficient, such as the unavailability of an efficientguarantee system. If the private sector is not wellorganized, the national association may not bestrong enough. Even when a credible associationemerges, quite often it is not in a position to set up

258 Customs Modernization Handbook

BOX 11.4 The SafeTIR

SafeTIR is a control system that aims at electroni-cally confirming the termination of a TIR trans-port at the customs office of destination and val-idating the certification of the terminationdemonstarted by a customs stamp affixed to aTIR carnet. SafeTIR provides the status of the TIRcarnet to customs and the TIR carnet issuingassociation with a confirmation, directly from the

customs authorities, of the final or partial termi-nation of the TIR carnet, mainly to enable com-parison of this confirmation to the paper-basedtermination. The electronic confirmation shouldreach the guarantee chain without delay.

Source: IRU, available at www.iru.org.

Transit and the Special Case of Landlocked Countries 259

BOX 11.5 The Unique Consignment Reference Number

UCR is a unique reference number that may berequired at any point during the customs proce-dure. It should (a) be applied to all internationalgoods moving under customs control, (b) beused only for tracking, audit, and reconciliationpurposes, (c) be truly unique at the internationallevel, and (d) be issued at the beginning of thetrade process.

The objective of the UCR is to define ageneric mechanism with sufficient flexibility tocope with the most common scenarios of inter-national trade. UCR is making maximum useof existing supplier, customer, and transportreferences.

UCR is a 35-digit alphanumeric code boundto the consignment. The agreed on structureconsists of the following:

• a first character for the year over a 10-yearperiod

• two-digit country ISO code identifying thenationality of the supplier

• 32 characters used as the national identifyingcode of the supplier plus a transaction codecreated by the supplier.

Source: Guidelines on Application of Informa-tion and Communication Technology (Kyoto Con-vention, General Annex, Chapter 7, Appendix 9.)

the guarantee system due to the underdevelopmentof the local financial infrastructure and the unwill-ingness of international insurance companies toprovide a cover given their perception of politicaland commercial risk. In other instances, politicaltension between countries makes the mutual recog-nition of carnets elusive, as is too often the case inCentral and Western Asia.

Attempts to Duplicate TIR Success Elsewhere

Due to the enormous success of the TIR system, itsconcept has been the basis for attempts to establishbilateral and multilateral agreements betweencountries elsewhere, such as in Asia, Africa, andSouth America. However, none of these initiativeshave been successful yet. A main reason for this hasbeen the absence of a common regional guaranteesystem. The internationally agreed on and recog-nized guarantee system is one of the core elementsof the TIR system, and in its absence TIR-like sys-tems will not be successful. On occasions, evenwhen such a system is included within a transitagreement, the failure to implement it fully jeopard-izes the efficiency of the regional transit regime. Forexample, the Economic Community of WestAfrican States’ (ECOWAS’) 16 member statessigned, in June 1982, a convention for the establish-ment of an ECOWAS Inter State Road Transit Sys-tem commonly known as TRIE (Transit RoutierInter-États). Chambers of commerce are assumingthe role of national associations. However, the TRIEhas been largely ignored, and about 70 percent of

the transit procedures in the ECOWAS region stillstem from bilateral accords and national regulationsand practices. These are, for the most part, inwardlooking and protectionist rather than supportive ofthe free movement of goods (N’Guessan 2003).Practical implementation shortfalls are often at theroot of the failure of regional or internationaltransit agreements.10

Transit Facilitation Institutions

Active cooperation between and among transit andlandlocked countries can help ease trade barriers.Such regional and bilateral cooperation can pro-mote an integrated approach to transit that goesbeyond customs transit issues. Many agreementshave a strong focus on the transit infrastructure,and also deal with visa, permit, and vehicle regula-tion issues. This section presents a selection of suchagreements and their accompanying institutionalarrangements, and highlights those factors thathave contributed to their successes or shortfalls insupporting transit.

Bilateral Agreements

Bilateral transit agreements are key building blocks ofcustoms harmonization initiatives. In the absence ofTIR-like conventions, bilateral agreements are

10. Regional TIR-like mechanisms are under consideration inCentral Africa, Central Asia (under the leadership of the AsianDevelopment Bank), and in Western Asia.

260 Customs Modernization Handbook

needed to make transit possible. They are also neededas a basis for regional agreements. In practice, bilat-eral agreements have strategic importance for devel-oping landlocked economies.

The scope of bilateral agreements is usuallypractical and reflects a balance between the inter-ests of the two countries, which are not always inaccordance with general principles of customstransit (convoy practices , for example). It usuallyincludes preferred route and freight sharingagreements, as well as the location of warehousesof the landlocked countries.11 However, somecore customs transit issues, such as guaranteeprocedures, are usually left out of the bilateralagreements.

Together the Indo-Nepal Treaty of Trade and theTreaty of Transit govern transit operations betweenthe two countries. Both treaties, which are renewedevery five years, go into great detail in outlining thespecific procedures required for the transit ofNepalese imports and exports through India. TheTransit Treaty includes specific points of entry andexit, a description of the 15 mutually agreed ontransit routes to and from Calcutta and Haldia, adescription of the warehouses and open spacesprovided, and detailed guidelines on the simplifiedadministrative procedures involved in the importor export of Nepalese goods via India. TheNepalese–Indian example includes a number ofelements that can help facilitate transit operationsbetween the two countries:

• a clear description of import and export proce-dures

• simplified customs administrative requirementsand documentation (in this case, the CustomsTransit Declaration)

• a reliable guarantee framework (backed by thegovernment of Nepal)

• a clear distribution of responsibilities and dutiesamong the different stakeholders

• customs support infrastructure (warehouses, theprovision of dry ports)

• a description of the agreed on transit routes.

Regional Agreements

The last few decades witnessed a proliferation ofregional agreements between or involving develop-ing countries. A number of them have direct impli-cations for customs transit:

• the already-mentioned Transit Routier Inter-Etats (TRIE) in the ECOWAS, the only examplebeyond TIR of an agreement dedicated only totransit

• the Association of Southeast Asian Nations(ASEAN) Framework Agreement on the Facilita-tion of Goods in Transit

• the Greater Mekong Subregion (GMS) Agree-ment for Facilitation of Cross-Border Transportof Goods and People

• Economic Cooperation Organization (ECO)Transit Framework Agreement—formed byAfghanistan, Azerbaijan, Iran, Kazakhstan,Kyrgyz Republic, Pakistan, Tajikistan, Turkey,Turkmenistan, and Uzbekistan

• Common Market for Eastern and SouthernAfrica (COMESA) agreement on single adminis-trative document.

Except for the TRIE, these regional agreements tendto lay down broad goals and policy directions.Actual customs transit facilitation may be depend-ent on other existing agreements or procedures. A2001 UNCTAD report points out “there has notbeen any shortage of measures and initiatives toimprove facilitation of transit traffic. COMESA,EAC, . . . and SADC all have various measures thatare in place to address transit facilitation. Unfortu-nately, the major problem has been poor implemen-tation.” (InfraAfrica Ltd. 2001, p. 45)

To achieve a significant impact on customstransit, regional agreements should address, directlyor through related mechanisms, the followingcomponents:

• Common customs documentation and procedures.The use of common procedures and documents,such as carnets or Single Administrative Docu-ment (SAD), are now available in many regionsor sub-regions.

• Cooperation between authorities, or one-stopborder posts. Within Africa, a number of initia-tives have been discussed over the years on

11. Efficient dry ports, such as Ngaounderé in Cameroon orBirgajn at the Indo–Nepalese border, are also part of this frame-work of bilateral facilitation.

one-stop border posts. Unfortunately, thesehave not been translated into concrete effectivemeasures.

• Regional customs guarantee system. So far, theguarantee system has proven to be the most elu-sive objective.

That regional agreements can work in the presenceof political will is illustrated by the successful intro-duction of the COMESA Yellow Card or Third PartyRegional Motor Vehicle Insurance Scheme. Thisscheme allows prepurchase of insurance, honoredby all participants, in local currency at the point oforigin. This means, for example, that a trucker trav-eling from Zimbabwe to Uganda who has to tra-verse Zambia, Tanzania, and Kenya does not need tostop at each border post to purchase insurance, butuses the Yellow Card to gain access and coverage.According to COMESA, the Yellow Card has, sinceits inception, generated revenue worth US$2 mil-lion, with only US$200,000 worth of claimsprocessed. In theory, transit guarantee schemes arenot that much more difficult to implement than thisinsurance scheme.

Transit Corridors

In transit corridors all relevant stakeholders aim towork together to ensure efficient and secure transitalong specific routes, to the benefit of landlockedand transit countries.

The potential strength of transit corridors liesprimarily in the possibilities they offer in con-fronting the concerns and interests of all relevantstakeholders, public and private, who can focus onpolicies and initiatives to cater to specific routes andborder crossings. Transit corriders thus offer thepossibility of tackling transit in a holistic manner(institutional, administrative, and infrastructure),initiating and effecting changes that may otherwisebe difficult to obtain at a wider national or regionallevel. In this sense, promoting specific transit docu-mentation or introducing harmonized bordercrossing procedures for specific routes are more eas-ily attainable objectives that, once in place, can beexpanded to national levels. The quality of the gov-ernance structure of the corridor is of criticalimportance in achieving those objectives. Transitcorridors benefit greatly from the involvement ofprivate sector stakeholders.

An UNCTAD document, “Strategies for Land-locked and Transit Developing Countries,” pointsout that “experience shows that most effective facil-itation measures concentrate on trade and trans-port corridors linking inland origins/destinationsin landlocked countries with entry/exit seaports incoastal countries” (UNCTAD 2003, p. 13). In prac-tice, the experience with transit corridors has beensomewhat mixed. Yet, there have been someencouraging initiatives and results that provide abasis for further developments in the field of tran-sit. The following examples illustrate the potentialbenefits conveyed by transport corridors for cus-toms transit.

Walvis Bay Development Corridor. The WalvisBay Development Corridor (now Trans Kalahari)became operational in late 1999. The driving forcebehind the project was the Walvis Bay CorridorGroup (WBCG), a public–private partnership. InNovember 2003 the Trans Kalahari Corridor Mem-orandum of Understanding was signed. It intro-duced a new single customs administrative docu-ment, which until then had been in use on a pilotbasis. This new simplified approach provides astreamlined and effective tool for managing cus-toms transit transactions throughout Namibia,Botswana, and South Africa and will replacethe cumbersome set of procedures involving up to10 national documents in each country transited.

Northern Corridor. This corridor provides a life-line through Kenya to the landlocked economies ofUganda, Rwanda, Burundi, and the landlockedareas within the Democratic Republic of Congo.The corridor is governed by the Northern CorridorTransit Transport Coordination Authority, whichaims to help harmonize and simplify the proceduresinvolved in transporting goods within the region.Significant achievements accomplished so farinclude the following:

• Simplification of port clearance procedures.• Documentary simplification, achieved through

the creation of the Road Transit Customs Decla-ration (RTCD), which is meant to be the singleadministrative document attached to a ship-ment through the corridor. However, in practicethe RTCD is often copied at the border ontoanother RTCD issued by the next country, anillustration of how difficult it may be to changeold habits.

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262 Customs Modernization Handbook

• The use of the COMESA Customs DeclarationDocument by Northern Corridor countries.

• Reduction by half of the transit time betweenMombasa, Kenya, and Bujumbura, Burundi,from over 30 days to about 15 days. Some unnec-essary border formalities along the corridor havebeen removed.

TRACECA. TRACECA is an EU-initiated pro-gram, launched in 1993, to develop a transport cor-ridor on a west-east axis from Europe, across theBlack Sea, through the Caucasus and the CaspianSea to Central Asia (a modern Silk Road). It aims toharmonize the legislative base in the transport andtransit sectors of its member states12 and places agreat emphasis on infrastructure development andimprovement. During its 10-year existence,TRACECA has implemented 53 projects and chan-neled over US$120 million in infrastructure invest-ment and technical assistance.

A key tool in the execution of this project was aborder audit whereby the transit procedures at 70designated TRACECA border crossing points (in all14 countries) were observed and recorded into adatabase. This comprehensive set of data has beenthe basis upon which subsequent recommendationson harmonized procedures at border crossings havebeen put forward.

The Program of Trade and Transport Facilitationin Southeast Europe

The Trade and Transport Facilitation in SoutheastEurope (TTFSE) regional program, supported bythe World Bank, the EU, and bilateral partners, wasset up in 1998 upon the request of the region’s coun-tries and the Southeast European Cooperative Ini-tiative. Its aim is to create a framework that will helpto reduce transport costs, fight corruption, and helpcustoms administrations gradually align their pro-cedures with EU standards. The countries includedin this program are Albania, Bosnia and Herzegov-ina, Bulgaria, Croatia, Romania, Serbia, and thelandlocked Moldova and Federal Yugoslav Republicof Macedonia. Since most of the trade flows arebound to or from the EU and the majority of the

countries involved fall within the TIR system, it isalready built on a strong transit base.

The design and implementation of the TTFSEwas based on a participatory methodology to ensurea sense of ownership among the various stakehold-ers involved—national agencies, customs officials,and transport operators. The TTFSE programbuilds on a number of regional mechanisms:

• a high-level Regional Steering Committee con-vening all countries twice a year to facilitatecooperation and experience sharing

• a regional Web site presenting all requirementsand procedures of border agencies

• public–private working groups interacting quar-terly

• regional conventional and distance-learningprograms to harmonize the quality of transportservice providers

• paired local project teams gathering all borderagencies at pilot border crossing points withinteractions across the border

• indicators that monitor border crossing times.

This customs modernization initiative has beenimplemented at a number of selected border crossingpoints and inland clearance terminals with a consid-erable degree of success. The program’s progressreport for 2002 highlights the significant reduction inwaiting time, the establishment of a transparent andpublic customs performance monitoring system (seebox 11.6), and the visibly improved dialogue amongcustoms administrations within the region.

The success of this program so far can be attrib-uted to reliable funding from the World Bank andvarious other donors, strong commitment by thenational governments involved, direct participationof all stakeholders, extensive use of informationtechnology, the introduction of human resourcesprograms, and the emphasis on close and meticu-lous monitoring to fine-tune and identify changingneeds and priority areas.

Two key ingredients of the success of TTFSE as atransit facilitation initiative have been the develop-ment of joint border facilities and the monitoring ofindicators. TTFSE has a harmonized set of indica-tors (box 11.6). Joint processing allows all customsand noncustoms (veterinary, phytosanitary) proce-dures to be carried out in a single stop in a commonborder processing zone.

12. Armenia, Azerbaijan, Bulgaria, Georgia, Kazakhstan, KyrgyzRepublic, Moldova, Mongolia, Romania, Tajikistan, Turk-menistan, Turkey, Uzbekistan, and Ukraine.

Transit and the Special Case of Landlocked Countries 263

Operational Conclusions

Customs transit is, in a sense, straightforward as it isbuilt on proven principles: secure the cargo, providea guarantee mechanism, and use a centralized flowof documentation. Customs transit is vulnerable topoor institutional frameworks. Transit operationsare extended in space and time and are, therefore,exposed to inefficient bureaucracy and to corruptpractices. The guarantee system needs a minimumdegree of sophistication of the local financial infra-structure, which is not always available in develop-ing countries. Transit cannot work without a certainamount of trust between customs and the privatesector, which means cultivating a mature andorganized private sector.

While transit facilitation is a bottleneck to thedevelopment of a number of developing countries,this is precisely where the reforms face the mostdaunting challenges. In many countries inadequatepractices or procedures, such as convoys, are deeplyentrenched. Here are some important operationalconclusions.

Customs transit is only one part of a widerrange of policy issues that involves many otherparticipants and procedures, including cross-border vehicle regulations, visas for truck drivers,insurance, and police controls. The quality ofinfrastructure is also a major concern for manylandlocked countries. Even if customs transit pro-cedures are made effective and efficient, full tradefacilitation will require that these other issues bedealt with. Some measures can be taken at thenational level while others require some form ofregional cooperation.

The existence of an efficient guarantee system,which is adhered to by customs authorities andproves not too cumbersome for exporters–importersand transport operators, is a prerequisite for transitoperations. The TIR and its network of nationalguaranteeing associations propose the best currentreference system. So far there is no convincing exam-ple of a fully functioning guarantee system availableto transporters in developing countries. In part, thisis because financial institutions have not been in aposition to propose products similar to the TIRinsurance in the development context. A workingguarantee system is also dependent upon customsenforcement and information systems.

Transit is dependent upon customs informationsystems within the country of transit. Customsshould be able to efficiently track the transit flows inand out of the country. Information processing andautomation, particularly the implementation of e-transit modules in information technology systems,will ultimately facilitate transit.

Customs modernization programs shouldencompass transit. The following components arecrucial for a transit module:

• harmonization of procedures at the regionallevel, for example, single documents

• development of enforcement capabilities beyondthe border to enhance the credibility of customstransit provisions

• consideration of the feasibility of joint borderprocessing

• monitoring of indicators of transit performance,as in TTFSE.

BOX 11.6 TTFSE Indicators

Agreed to by all participating countries, the set ofindicators has allowed both general performanceand the real time impact of the different pilot siteinitiatives to be monitored. To improve the effi-ciency and relevance of this initiative, the pro-gram has tried to institutionalize the collectionprocedures at each of the pilot sites, relying onlocal computer applications or simple measure-ment techniques to obtain most of the key fig-ures automatically. An important feature of tran-sit-related indicators is that the design of theindicators and the data collection involve both

public agencies and the private sector (truckingindustry). Transit related indicators include thefollowing:

• Trucks cleared in less than 15 minutes• Irregularities per number of examinations• Truck examinations• Average border exit time• Average border entry time• Surveyed occurrences of corruption.

Source: TTFSE report 2002 at www.ttfse.org.

Transit facilitation institutions such as corridoragreements promote active cooperation betweenand among transit and landlocked countries, andare a pivotal element in helping reduce or removephysical, administrative, and institutional barriersto trade. Transit agreements are important in form-ing and shaping such cooperation, either at thebilateral, subregional, or regional level. In practice,such agreements promote an integrated approachto transit that goes far beyond customs transit, andtackles issues such as infrastructure, visas, permits,and insurance.

Public–private cooperation will bring decisivecontributions to transit cooperation. It is recom-mended that appropriate frameworks, such asNational Trade and Transport Facilitation Com-mittees, be set up and be strengthened (UNECE2000). Regular exchange of information betweenpublic agencies and stakeholders will help to iden-tify where the shortfalls lie in border crossing pro-cedures. Furthermore, basic transit provisions,including guarantees, work considerably betterwith a mature and organized transport sector.Reforms in this sector go far beyond customsreform. Public policies must foster the emergenceof modern operators, and phase out transit activi-ties by obsolete equipment and informal opera-tors, with whom efficient transit provisions arevirtually impossible.

Further Reading

Global Facilitation Partnership.www.gfptt.org.Grosdidier de Matons, Jean. 2004. “Facilitation of Transport and

Trade in Sub-Saharan Africa: A Review of Legal Instru-ments.” SSATP Working Paper No. 73. Washington, D.C.: TheWorld Bank.

International Road Transport Union. www.iru.org.UN/CEFACT (United Nations Centre for Trade Facilitation and

Electronic Business) and UNCTAD (United Nations Confer-ence on Trade and Development). 2002. “Compendium ofTrade Facilitation Recommendations.” ECE/TRADE/279.February.

UNCTAD. 2003.“Strategies for Landlocked and Transit Develop-ing Countries to Plan and Implement Sustainable Trade andTransport Facilitation Initiatives.” Issue Note by the SecretaryGeneral of UNCTAD. Document UNCTAD/SDTE/TLB/2003/2. July 23.

References

Amjadi, A., and A. Yeats. 1995. “Have Transport CostsContributed to the Relative Decline of Sub-SaharanAfrican Exports?” World Bank Policy Research Paper 1559.Washington, D.C.: The World Bank.

Favier, Jean. 1971. Finances et Fiscalité au Bas Moyen Age. Paris:SEDES.

Faye, Michael, John McArthur, Jeffrey Sachs, and Thomas Snow.2004.“The Challenges Facing Landlocked Developing Coun-tries.” Journal of Human Development. 5(1): 31–68.

Grosdidier de Matons, Jean. 2004. “Facilitation of Transport andTrade in Sub-Saharan Africa: A Review of Legal Instru-ments.” SSATP Working Paper No. 73. Washington, D.C.: TheWorld Bank.

InfraAfrica Ltd. 2001.“Review of Progress in the Development ofTransit Transport Systems in Eastern and Southern Africa.”Prepared for the Fifth Meeting of Governmental Expertsfrom Land-locked and Transit Developing Countries andRepresentatives of Donor Countries and Financial andDevelopment Institutions. Document UNCTAD/LDC/115.New York. July 31–August 3.

Lakshmanan, T. R. 2001. Integration of Transport and Trade Facil-itation: Selected Regional Case Studies. Washington, D.C.: TheWorld Bank.

Limao, N., and A. Venables. 1999. “Infrastructure GeographicalDisadvantage and Costs.” World Bank Policy Research Work-ing Paper No. 2257. Washington, D.C.: The World Bank.

N’Guessan N’Guessan. 2003. La problématique de la gestion inté-grée des corridors en Afrique subsaharienne. The World Bankand SSATP. Document d’analyse SSATP No. 3F. Washington,D.C. May.

UN (United Nations). 2003. “Almaty Programme of Action:Addressing the Special Needs of Landlocked DevelopingCountries within a New Global Framework for Transit Trans-port Cooperation for Landlocked and Transit DevelopingCountries.” Adopted by the International Ministerial Confer-ence of Landlocked and Transit Developing Countries andDonor Countries and International Financial and Develop-ment Institutions on Transit Transport Cooperation in Almatyon August 28–29, 2003. www.un.org/special-rep/ohrlls/imc/Almaty%20Programme% 20of%20Action.pdf.

UN/CEFACT (United Nations Centre for Trade Facilitation andElectronic Business) and UNCTAD (United Nations Confer-ence on Trade and Development). 2002. “Compendium ofTrade Facilitation Recommendations.” ECE/TRADE/279.February.

UNCTAD (United Nations Conference on Trade and Develop-ment). 2003.“Strategies for Landlocked and Transit Develop-ing Countries to Plan and Implement Sustainable Trade andTransport Facilitation Initiatives.” Issue Note by the SecretaryGeneral of UNCTAD. Document UNCTAD/SDTE/TLB/2003/2. July 23.

UNECE (United Nations Economic Commission for Europe).2000. “Creating an Efficient Environment for Trade andTransport—Guidelines to Recommendation No. 4, NationalTrade Facilitation Bodies.” Document ECE/TRADE/256.Geneva.

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265

12THE ROLE OF CUSTOMS

IN CARGO SECURITY

Luc De Wulf and Omer Matityahu

TABLE OF CONTENTS

Initiatives to Improve Cargo Security 266

Management Implications for Customs 273

Technical Means to Assist Security Checks 275

Operational Conclusions 281

Annex 12.A Port Risk Assessment 281

Further Reading 283

References 283

LIST OF TABLES

12.1 Selected Operational Practices to EnhanceCargo Security 276

12.2 Technical Means to Assist SecurityChecks 277

LIST OF BOXES

12.1 Maritime Security Initiative at Panama CanalWaters 269

time of importation. Improving security in thesupply chain, however, requires that this traditionalmethod of operating must change. For it to do so,customs now needs to gather information andassess risk in advance of arrival, so that effectiveaction can be taken, preferably before a shipembarks or an aircraft takes off, or at the latest,at the time of its arrival. The information neededfor these security processes comes from severalsources, but a crucial element is the advance infor-mation available from the businesses exporting ortransporting the goods. Customs’ skill in assessingthe information through analytical processes,deployment of resources, and effective communi-cation and decisionmaking, therefore, has becomeeven more important than in the past.

Security is of great importance to governments,but so is facilitating legitimate trade. If appliedcorrectly, security can enhance facilitation by build-ing business confidence, increasing predictabilityand trade flow, and, as a consequence, improving

This chapter is intended to assist customs adminis-trations in dealing with the security challengesfaced by international transport and shipping serv-ice providers. The guidance and concepts providedhere are geared toward helping governments in thedevelopment of national security policies andstrategies, including preparing a needs assessmentand implementing the strategy within the contextof an overall risk management approach.

The emergence of international terrorism hascaused the issue of security to become one of themajor challenges facing customs administrations.In the past, many customs administrations per-formed most of their preventive operations asgoods arrived at seaports, airports, and land bor-ders based upon an entry declaration made at the

Omer Matityahu is a consultant for ICTS Global Security B.V.,whose contribution was financed by a grant from the govern-ment of the Netherlands. The contribution of Will Robinson ofthe World Customs Organization is gratefully acknowledged.

inward investment. The information required bycustoms can also be enhanced by customs–tradecooperation.

Protecting society in an effective and efficientmanner requires the international trade supplychain to become the focus of attention in itsentirety, rather than simply when goods are enter-ing, leaving, or transiting a country. This changingenvironment requires an “all of government”approach. Governments would thus have theopportunity to use customs as a key resource inborder security by using customs’ experience withmanaging risks and its knowledge of internationaltrade as important elements in addressing issues ofnational security. Customs’ roles in security andfacilitation complement those contributions madeby other competent agencies as part of an inte-grated response. Cooperation and communicationbetween customs and the lead agencies for terror-ism; immigration; and policing maritime, aviation,and land transport; and intelligence operations arevital. In this manner, customs can contributetoward the wider security agenda as outlined in theUnited Nations Security Council Resolutions, par-ticularly 1373 (passed in 2001) and 1456 (passed in2003), which call for an integrated response tofighting terrorism. Customs’ role is thereforechanging rapidly.

Developing and implementing security stan-dards across international borders is likely to pres-ent a formidable challenge, but doing so is essentialto safeguard the integrity of the international sup-ply chain. Efforts to develop international stan-dards are underway on several fronts, but much stillremains to be done to standardize these norms andimplement them effectively. Due to the numberand diversity of nations and stakeholders involvedin the international supply chain, achieving con-sensus on these and other standards could be diffi-cult and time consuming.

This chapter examines some of the operationaland management considerations that will be ofinterest to those establishing or reviewing customs’security arrangements. The first section presentsinitiatives relating to the areas of border security.The second section analyzes the managementimplications of the heightened concern for customssecurity risks. The final section focuses on opera-tional practices for customs in light of theserenewed concerns.

Initiatives to Improve Cargo Security

International trade involves many partners andprocesses that together constitute a logistics chain.Each link in that chain is to some extent subject tosecurity risks. These risks are not new and have his-torically concerned many professional organiza-tions. The protection of society has always been oneof customs’ main missions. However, with theevents of September 11, 2001, security has attractedrenewed focus from governments. Existing initia-tives to strengthen security have been revisitedand new ones have emerged. Both internationaland bilateral initiatives have been reviewed andstrengthened. This section briefly reviews these ini-tiatives and details what these mean in the contextof customs’ operations.

World Customs Organization

The WCO’s activities in the area of security areundertaken in close cooperation with the special-ized international organizations that focus on spe-cific transport modes, such as the InternationalMaritime Organization (IMO), the InternationalCivil Aviation Organization (ICAO), and the Inter-national Air Transport Association (IATA). In lightof its mandate to enhance the effectiveness and effi-ciency of customs administrations, the WCO aimsat building trade facilitation–appropriate securityinitiatives, so that world trade is not unduly affectedor hindered by enhanced security measures.1

In June 2002, the WCO Council approved a res-olution on security and facilitation of the interna-tional trade supply chain. This resolution leddirectly to the formation of an international TaskForce on Security and Facilitation of the Interna-tional Trade Supply Chain, comprising customsadministrations, other international organizations,and international trade and transport organiza-tions. The task force has produced a comprehensivepackage of guidelines and other measures thatwould enable customs administrations to imple-ment and apply modern risk-based control proce-dures. The security and facilitation concepts devel-oped by the task force involve the submission ofadvance electronic information at the earliest

266 Customs Modernization Handbook

1. This section is based on information from the WCO Web sitewww.wcoomd.org.

moment in the supply chain cycle, so that customsadministrations can perform risk assessmentprocesses well in advance of shipment. Thisapproach allows customs’ security role to be per-formed at or before export, while goods are in tran-sit, or at or before importation. The informationitself is provided by the most appropriate privatesector entities involved in the supply chain, that is,the electronic information message is composed ofinformation from exporters, importers, and serviceproviders such as carriers. The procedures are con-tained in the Advance Cargo Information Guide-lines, which form a central part of a comprehensivepackage of measures. The WCO has developedother instruments to fulfill its security mandate:

• a list of essential data elements required to iden-tify high-risk consignments

• a new multilateral Convention for CustomsAdministrations, which will provide a mecha-nism for customs administrations to share rele-vant information on a bilateral, regional, ormultilateral basis

• guidelines for businesses operating in the inter-national trade supply chain that describe themeasures and procedures that should be adop-ted by private sector operators

• guidelines concerning the purchase and opera-tion of container scanning equipment

• a databank of modern technological devices.

The implementation of the guidelines is beingmanaged through an international action plan andby a high-level strategic group of Directors Generalwho provide strategic advice on the further devel-opment of security and facilitation methodologiesand standards. The WCO relies on voluntary com-pliance of its members, because it does not have anenforcement mandate.

Sea Cargo: Organization and Initiatives

World trade is dependent on maritime transportand great strides have been made in recent years torender this system as open and frictionless as possi-ble to spur greater economic growth. However, thefactors that have allowed maritime transport tocontribute to economic prosperity also potentiallyincrease its security risks. The risks range from thepossibility of physical breaches in the integrity of

shipments and vessels to documentary fraud andillicit money-raising activities by terrorist groups.

International Initiatives Both international organ-izations and national governments have undertakeninitiatives toenhanceseacargosecurity.

International Maritime Organization. The Interna-tional Maritime Organization2 (IMO) is a special-ized organization within the United Nationsestablished to develop international maritime stan-dards, promote safety in shipping, and preventmarine pollution from ships. However, afterSeptember 11 the IMO amended its InternationalConvention for the Safety of Life at Sea (SOLAS)and established an International Ship and PortFacility Security (ISPS) Code in December 2002.ISPS requires ships on international voyages and theport facilities that serve them to conduct a securityassessment (for details, see annex 12.A), develop asecurity plan, appoint security officers, performtraining and drills, and take appropriate preventivemeasures against security incidents. It is a com-prehensive, mandatory security regime for inter-national shipping and port operators (at thistime, only the security assessments are mandatory),intended to enable better monitoring of freightflows to combat smuggling, and to respond to athreat of terrorist attacks. The International LaborOrganization (ILO), also a United Nations agency,determines the requirements to be included inidentification documents for seafarers. Since -February 2002, ILO and IMO have been working onthe issuance of seafarer documents, which wouldinvolve checking the background of crewmembersonboard ships transporting cargoes that aredestined for the United States. In addition, the ILOmay consider standards for port worker identifica-tion documentation. Noncompliance with ISPSrequirements can result in loss of revenue and thepotential for increased liability in the event of asecurity incident.

Contracting parties to the ISPS Code are tobring their national legislation in line with thecode, ensure its enforcement, undertake security

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2. For details on the IMO, see www.imo.org/home.asp. Furtherinformation can be obtained from The Subcommittee on CoastGuard and Maritime Transportation Hearing on Interim FinalRegulations on Port Security at www.house.gov/transportation/cgmt/07-22-03/07-22-03memo.html.

assessments, prepare security plans, and notify theIMO of progress made with respect to these assess-ments and plans. The code also requires thenational authorities to notify the IMO administra-tion and its contracting governments of the controlmeasures instituted for a vessel calling at a non-compliant port facility. Finally, IMO measures willalso contain a strong port state control mechanismthat authorizes taking control of vessels that havecalled on foreign ports that are not in compliancewith SOLAS and the ISPS Code.

The ISPS Code became mandatory on July 1,2004. This implies that by that date the prescribedsecurity measures will need to be implemented forports and ships to be certified. The governmentwould issue the security certifications; but the localadministrations that register ships may grantauthorization to a private company to act as a Rec-ognized Security Organization (RSO) to approveship security plans, audit ship security systems,and, where appropriate, issue the certificates onbehalf of the local administration. At this point therequirements for RSOs have not yet been agreedupon. The IMO intends to provide for ISPS certifi-cation under strict conditions following a carefulinspection. Under the ISPS rules, the principalresponsibilities of contracting governments are todetermine and set security levels, and communicateinformation regarding security levels to ships flyingtheir flag, to their port facilities, and to foreign ves-sels in or about to enter their ports.

Noncompliant ships or ports can be decertified,pending corrective action. If this occurs, such ves-sels will not be allowed to operate or such ports willoperate subject to international penalties. Thiswould have negative economic consequences forships and ports that fail to meet the requirementsof the ISPS Code. The most likely scenario for anoncertified ship entering a certified port is that itwill be subjected to thorough and time-consuminginspections once it enters a country’s territorialwaters.

Enhancing the safety of maritime cargo trans-port will not come cheaply. An Organisationfor Economic Co-operation and Development(OECD) study published in July 2003 (OECD2003) estimated that the initial cost to ship opera-tors for ISPS Code compliance would be at leastUS$1,279 million, with subsequent annual expen-ditures of US$730 million. This is equivalent to

about US$30,000 in initial costs and US$17,000 inannual expenditure per vessel (based on an esti-mate that 43,291 vessels were trading internation-ally in 2000). For international seaports the costswere estimated at US$963 million and US$509 mil-lion for initial and annual costs, respectively. Forthe United States, the average cost per seaport wasestimated at US$4.26 million in initial costs andUS$2.25 million in annual expenditures.

See box 12.1 for an example of how the ISPSCode is being implemented at the Panama Canal.

United Nations Economic Commission for Europe.The UNECE is currently reviewing its relevantinstruments in the areas of trade and transport.3 Auseful basis for UNECE work in this area may bethe Supply Chain Model and possibly the Interna-tional Trade Transaction Model, both developed byUN/CEFACT (United Nations Centre for TradeFacilitation and Electronic Business). UNECE iscurrently updating both of these models.

The United States’ Initiatives Since September 11,2001, there has been growing concern that terroristweapons could be smuggled in some of the millionsof maritime containers arriving annually at UnitedStates seaports.Based on international legislation, theUnited States enacted the U.S. Maritime Transporta-tion Security Act (MTSA) of 2002 to establish paralleldomestic requirements for U.S. facilities and vessels.While many of the requirements in the MTSAdirectly align with ISPS requirements, it includesdomestic vessels and facilities. There are severalU.S. government initiatives related to cargo security.The U.S. Bureau of Customs and Border Protection(CBP) initiatives consist of the Customs-Trade Part-nership Against Terrorism (C-TPAT), the 24-HourAdvance Manifest Rule, and the Container SecurityInitiative (CSI) to screen containers that pose apotential risk for terrorism at overseas ports. The U.S.Coast Guard initiative is the 96-Hour Notification ofArrival.

CBP Initiative—Customs-Trade Partnership AgainstTerrorism. In November 2001, the concept ofC-TPAT4 was introduced to the trade communityas a cooperative initiative with the private sector,

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3. See www.unece.org/trade/welcome.htm.

4. See CBPWeb site at www.cbp.gov/xp/cgov/import/commercial_enforcement/ctpat/.

with the objective of fortifying the supply chainand deterring terrorists and the implements of ter-ror from being introduced into the internationalcommercial environment. As of February 24, 2004,5,730 companies had enlisted in C-TPAT. ThroughC-TPAT, CBP and the trade community cooperatein designing a new approach to supply chain secu-rity to strengthen the borders against terrorismwhile continuing to facilitate the legitimate flow of

compliant cargo and conveyances. Companies fillout a questionnaire, pulling together internal infor-mation about a company’s security-related assetsand procedures. C-TPAT continues to actively con-duct visits to its member companies to confirmthat their supply chain security measures containedin their security profiles are reliable, accurate,and effective. CBP is also working with its membersto develop and implement the CBP Smart Box

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BOX 12.1 Maritime Security Initiative at Panama Canal Waters

The SOLAS amendments and the ISPS Code ofthe IMO contain comprehensive measures thatprovide the option of requesting vessels toprovide preliminary information regarding crew,passengers, origin, and destination of cargo.This information can be used by the PortSecurity Officer to perform risk assessments, butwould need to be available before the vesselarrives in the port.

By virtue of its new framework, the PanamaCanal Authority (ACP) is responsible for ensuringthe most efficient use of its resources and forproviding an optimum level of service and secu-rity to its clients. The ACP has deemed it neces-sary to develop an adequate information systemto improve the information that is needed forsecurity verifications and transit operations.Such a system will make possible the electronicreception of preliminary information, its properanalysis, and risk level assessments. The currentprocess is time and resource consuming for ACPclients, particularly for Masters and Captains ofvessels, and involves manually filling out therequired forms to ensure a secure, safe, and effi-cient transit through the Panama Canal. It is alsoprone to human error, leading to costly delaysresulting from incorrect or untimely data.

On September 2, 2003, ACP awarded itsAutomated Data Collection System Project(ADCS) to CrimsonLogic Pte Ltd. The ADCS con-sists of the following elements:

Electronic Data Collection System (EDCS). TheEDCS allows international carriers and localPanamanian carrier agents to submit Ship Dueand Transit Booking requests to ACP via theInternet through the World Wide Web, EDI, orXML, 96 hours prior to arrival in Panama Canalwaters. It also facilitates the electronic submis-sion of passenger and crew lists, admeasurerdata sheets, and other necessary documents toACP for advance processing. The advancedocument submission enables ACP to carry out

risk assessment on the arriving vessels and theircargoes.

Mobile Data Collection System (MDCS).MDCS is an internal operating system thatallows ACP’s Canal Boarding and Security Offi-cers to conduct inspections aboard the vesselspassing through Canal waters and ensuresheightened general security within ACP’s juris-diction. The data are collected and stored in realtime using pen-based wireless mobile systems.In the next phase of the project, the MDCS willbe linked to a data warehouse where a RiskAssessment Analysis tool, linked to federal agen-cies such as customs, national security agencies,and the Coast Guard, will provide real-timeinformation on all vessels passing throughPanama Canal waters. The advance informationwould be beneficial for customs and other fed-eral agencies to more effectively monitor andfacilitate the flow of cargo and to detect high-risk shipments for security, contraband, andother enforcement reasons.

The ADCS project is expected to generate thefollowing benefits: (a) accurate and timely col-lection of security data and maritime operationsinformation to help optimize vessel schedulesand enhance security in the Canal; (b) improvedand more accurate data validation; (c) efficientelectronic information interchange betweenACP and its clients; (d) improved user-friendlyaccess through the use of the Web-based inter-face by ACP and its clients, including customsadministrations all over the world; (e) overallreduction in operation costs and improvementin the competitiveness of the organization; (f)reduced form processing time and overallimprovements in productivity; and (g) enhancedinformation and system security, ensuring thathackers or saboteurs do not interrupt ACP’soperations.

Source: CrimsonLogic.

initiative. Sealing standards and techniques, cou-pled with a Container Security Device (CSD), aredesigned to detect evidence of tampering duringthe transit process and to enhance container secu-rity and the integrity of containerized cargo. C-TPAT aids companies in optimizing their internaland external management of assets and functionswhile at the same time enhancing security. Whenadministered together, enhanced security practicesand procedures, and improved supply chain per-formance, mitigate the risk of loss, damage, andtheft, and reduce the likelihood of introduction ofpotentially dangerous elements into the global sup-ply chain.

CBP Initiative—24-Hour Advance Manifest Rule.Advance information is the key component ofCBP’s strategy to protect legitimate trade from ter-rorists. The “24-hour rule” for advance manifestinformation was put into effect on February 2, 2003(ref B-CBP). It instructs carriers in possession ofcontainers to be loaded on board a U.S.-bound ves-sel to make a declaration to CBP at least 24 hoursbefore the cargo is loaded at a foreign port. Thisdeclaration includes information pertaining to theshipper and consignee, as well as a precise descrip-tion of the container’s contents. Vague descriptionssuch as “said to contain,” “FAK” (Freight of AllKinds), and “General Merchandise” are notaccepted. Upon inspecting the manifest, CBP willmake a decision to load the container or send a“DO NOT LOAD” message to the carrier or Non-Vessel Operating Common Carrier (NVOCC)before the container’s scheduled load time. If a car-rier loads a container for which a “DO NOTLOAD” message has been sent, the vessel will not beallowed to unload at the U.S. port until the infor-mation is amended. At this point, the clock for the24-hour requirement starts again. The rule waseffectively implemented in cooperation and inpartnership with the trade and transportationindustry.5

CSI Initiative—Container Security Initiative.Launched in January 2002, the CSI involvesbilateral arrangements between the United Statesand foreign countries to reduce the risk of globalcontainerized cargoes being exploited by terror-

ists.6 The CSI moves the focus of container inspec-tion to the port of lading for early detection of anypotential threat. It aims to establish security crite-ria to identify any container that poses a potentialrisk for terrorism, prescreen those containers iden-tified as posing a risk before they arrive at U.S.ports, use technology to quickly prescreen thosecontainers, and develop and use smart and securecontainers. The CSI deploys U.S. officials to thehost country to work in conjunction with localofficials. This is a reciprocal program, and severalcountries have stationed their personnel in U.S.ports as well. The objective of the CSI is to workwith the host country to identify and screen cargoto detect potential risks for terrorism at the earliestpossible opportunity. The first phase of CSI isfocused on implementing the program at the top20 foreign ports, which ship approximately two-thirds of the volume of containers to the UnitedStates.7 So far, the benefits for goods in containerspassing through CSI ports and destined for theUnited States are not clearly spelled out, nor arethe disadvantages for goods moving through otherchannels. The CBP intends to expand the programto additional ports based on volume, location, andstrategic concerns.

U. S. Coast Guard Initiative—96-Hour Notificationof Arrival. Issued on February 28, 2002, the 96-HourNotification of Arrival initiative requires 96-houradvance notification of vessel arrival at U.S. ports(Pluta 2001). This requirement includes the sub-mission of cargo manifests, itinerary, and thoroughinformation about the crew, including ports wherethey boarded and possible aliases that crew mem-bers are known to employ. The submission of crewdetails and cargo manifests is time-consuming andmay require investment on the part of carriers and

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5. See CBP Web site at www.cbp.gov/xp/cgov/import/carriers/24hour_rule/.

6. See CBP Web site at www.cbp.gov/xp/cgov/enforcement/inter-national_activities/csi.

7. As of mid-January 2004, eight European Union (EU) coun-tries had signed bilateral agreements with the United States. Thecontainer traffic from these ports to the U.S. covers approxi-mately 85 percent of all maritime container traffic from the EUto the U.S. The European Community has launched infringe-ment procedures against those Member States that have signeddeclarations of principle with the U.S. CBP. It is concerned thatthese measures will have negative effects on trade flows and willlead to competition between EU ports. It argues for an expan-sion of the 1997 EC–US Agreement to cover these aspects(www.europa.eu.int). For an update on the ports included in theCSI, see the Web site of the U.S. CBP, www.cbp.gov.

freight forwarders to improve their informationtechnology systems to ensure the timely and accu-rate electronic submission of data.

The European Union At the end of July 2003,the European Commission (EC) presented to theEuropean Parliament and the European Council aseries of measures to address security issues. Part ofthis package was in response to U.S. security initia-tives in the customs area. These measures bringtogether the basic concepts underlying the newsecurity management model for the EU’s externalborders, such as a harmonized risk assessment sys-tem. The EC proposed a number of measures totighten security of goods crossing internationalborders. These include requiring traders to providecustoms authorities with information on goodsprior to importing goods to or exporting goodsfrom the EU, providing reliable traders with tradefacilitation measures, and introducing a mecha-nism for setting uniform community risk-selectioncriteria for controls, supported by computerizedsystems. A technical working group is to be set upto further develop these measures (EuropeanCommission 2004).

Air Cargo: Organizations and Initiatives

The world has in the past spent billions of dollarson security initiatives to protect the aviation indus-try as well as countries’ freedom of movement andprogress in spite of terrorism. Many countries andindustrial organizations have already enacted orfollowed up with air cargo security laws, rules, orguidelines. These laws have affected the way thatairports, airlines, and shippers worldwide mustinteract if they are to use, or be part of, the aviationcommunity. Strengthening international standards,agreements, and common commitment is the logi-cal next step to protect air travel and transportagainst terrorism. The main initiatives and organi-zations that strive to improve air cargo securityworldwide, and with whom customs administra-tions need to enter into strategic alliances, arebriefly described here.

The International Civil Aviation OrganizationThe ICAO is a specialist agency of the UnitedNations that was created in 1944 with a mission “toensure that International Aviation may be devel-oped in a safe and orderly manner.” Until the events

of September 11, 2001, the ICAO security modelwas regarded as adequate and sufficient to ensurethe safety of passengers, aircraft, and goods. Con-tracting states are obliged to adjust their nationallegislation to bring it in line with the ICAO Con-ventions.

The Council of ICAO approved in June of 2002,in principle, an ICAO Aviation Security Plan ofAction for strengthening aviation security. A centralelement of this Plan of Action is regular, manda-tory, systematic, and harmonized audits to enableevaluation of aviation security systems in place inall of the 188 member states of ICAO, and to iden-tify and correct deficiencies in the implementationof ICAO security-related standards. These auditsshould include aircraft security checks, backgroundchecks of any individuals requiring unescortedaccess to a security restricted area, and screeningability to detect weapons, explosives, or other dan-gerous devices which may be used to commit an actof unlawful interference. Security arrangementsand measures should be extended to all civil avia-tion, whether international or domestic travel, andshould cover all areas relating to access to the air-craft for staff as well as passengers and cargo han-dlers. Contracting states should share with othercontracting states any threat information thatapplies to the aviation security interests of thoseStates, as far as is practicable. They should alsoempower the appropriate authority to manage thenational civil aviation security program.8

The International Air Transport AssociationThe IATA is the world trade association of sched-uled international airlines.9 Airline members nowtotal more than 260, under the flags of over150 independent nations, and carry more than 95percent of the world’s scheduled international airtraffic. The IATA has a Security Advisory Commit-tee, which makes recommendations to airlineswith regard to the security of all international avi-ation. These recommendations pertain to the secu-rity precautions that should prevail in all areas ofthe airport, including parking areas and boardingareas for passengers. Most airlines conform tothese standards but adjust their implementation to

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8. See the ICAO Web site at www.icao.int, and the Institute forSecurity Issues Web site at www.iss.co.za.

9. See the IATA Web site at www.iata.org.

local circumstances. IATA has established theCargo Security Task Force (CSTF) to define theairline industry’s position on cargo security and toensure that all members implement cargo securitymeasures properly. It deals with issues as they areput forward by member airlines. The CSTF coor-dinates its actions with the IATA Security Com-mittee on issues relating to lobbying internationalorganizations and national regulatory bodies, andpromotes the implementation of unified cargosecurity standards worldwide. In that capacity itworks with customs, airline members, freight for-warders, shippers, and government authorities toimprove standards in shipment documentationand the automated tracking of cargo. Workingclosely with IATA CSTF is the Global AviationSecurity Action Group,10 which is an industrygroup that coordinates the global aviation indus-try’s input to achieve an effective worldwide secu-rity system and ensure public confidence in civilaviation.

European Civil Aviation Conference The Euro-pean Civil Aviation Conference (ECAC), based inParis, was established to promote the coordination,better utilization, and orderly development of airtransport within Europe, as well as to consider anyspecial problems. Its most recent directive (Decem-ber 16, 2002), issued by the European Parliamentand the European Council, aims to establish andimplement common basic standards on aviationsecurity measures to prevent acts of unlawful inter-ference against civil aviation; provide a basis fora common interpretation of the related provi-sions, called those of the Chicago Convention;11

and set up appropriate compliance monitoringmechanisms.

U.S. Transportation Security AdministrationInitiatives The U.S. Transportation SecurityAdministration (TSA) issued an Air Cargo StrategicPlan, which will set in motion a course of action tosignificantly expand current security policies, pro-cedures, and systems for the protection of bothcargo and passenger-carrying aircraft, and all aircargo operations (TSA 2003). TSA has tailored theair cargo security program to manage various secu-rity risks in a cost-effective manner. It is based onthe TSA’s goal of securing the air cargo supply chain,including cargo, conveyances, and aircraft, throughthe implementation of a layered solution. This sys-tem includes the screening of all cargo shipments todetermine their level of relative risk, working withU.S. industry and federal partners to ensure that100 percent of items that are determined to be ofelevated risk are inspected, developing and ensuringthat new information and technology solutions aredeployed, and implementing operational and regu-latory programs that support enhanced securitymeasures.

TSA has established the Aviation Security Advi-sory Committee (ASAC), as a standing committeecomposed of federal and private sector organiza-tions (U.S. Department of Homeland Security2003). The ASAC was created in 1989 in the wake ofthe crash of Pan Am 103 over Lockerbie, Scotland.Its members include groups representing victimsand survivors of terrorist acts, corporate shippers,freight forwarders, aircraft owners, airports, stateaviation officials, aircraft manufacturers, and repre-sentatives of passenger and cargo airline manage-ment and labor. In May 2003, ASAC formulatedrecommendations to enhance air cargo security.These recommendations focused on strengtheningthe known shipper programs, enhancing regula-tions of indirect air carriers, and strengtheningsecurity for all cargo aircraft. TSA will use theserecommendations to develop a strategic plan.

The United Kingdom—Known Shipper andCargo Screening The United Kingdom is aleader in “known shipper” programs, havingenacted laws and implemented programs for vet-ting shippers in the 1990s (Sander 2003). Opera-tion Safe Commerce and the TSA known shipperprograms are investigating, testing, and developingnew technologies and alternative strategies forcargo and container security screening, which for

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10. Its members are: IATA, regional airline associations, Interna-tional Air Carriers Association,Airports Council International, theInternational Federation of Airline Pilots Associations, Interna-tional Transport Workers Federation, Airbus, plus participationand input from Boeing, ICAO, and INTERPOL as observers.

11. Annex 17 to the ICAO Chicago Convention (a conventionheld by ICAO in response to hijacking and terror threats thatincreased prior to it), the document on security with its manda-tory standards came into being on March 26, 1974. It is the reg-ulatory benchmark against which States are able to quantifytheir contractual commitments to international civil aviation.From it should evolve compliant legislation, a national program,and airport and airline programs.

the moment is usually conducted in facilities otherthan those of baggage security screening at mostairports around the world. A future design strategymight be to consolidate baggage and cargo securityscreening at the same location.

A known shipper regime currently exists onlyfor U.K. airfreight and requires that the shipperregister its organization with the relevant authori-ties (U.K. or EU) on an official database of “knownshippers.” This information can then be sent elec-tronically to port and customs authorities to alertthem of the shipper’s or the consignment’sintegrity. To achieve known shipper status, a com-pany prepares a Shipper Security Plan (SSP), whichdemonstrates to customs and to the security forcesthat appropriate security measures are in place,covering premises and day-to-day operations, thatsecure and prevent infiltration by terrorists andtheir materials. Premises and security practices arechecked periodically to ensure that SSP’s are stillappropriate and are being observed by the shipper.

Land Border Security

Controlling cargo at land borders poses a differentchallenge for any country wishing to improve it. Bynature, a border control point does not always con-stitute a bottleneck, unlike airports and seaports,which are characterized as mandatory transitpoints for all regulated international shipping.Because most countries lack “hermetically sealed”land borders, smuggling of goods that can presentsecurity threats can take a variety of routes. Also,land border control depends largely on local lawsand regulations, making it difficult to set interna-tional standards for border control. For this reason,this chapter focuses on air and sea cargo control.Countries may use the security concepts and toolsin this chapter and adapt them to meet their bordercontrol needs.

Management Implications for Customs

Such major changes to the operating environmentof international trade require customs to review itsstructure and operations to respond to the twinchallenges of security and facilitation. Manyadministrations have started to adjust their techni-cal operations, but there may be a need to consider

reforms of a much broader nature. These reformsare spelled out in the following sections.

Strategic and Operational Planning

Strategic and operational planning should takeaccount of the changing environment, includingwith respect to security threats. The fight againstterrorism is a “whole of government” undertaking,and customs should assist in defining its role andspecific responsibilities within this integratedapproach. Customs should strive to establish tar-gets and performance criteria for each of thesetasks. In the process, customs should maintaincommunication arrangements with other keystakeholders in the public and private sectors.

To be in a position to implement these newresponsibilities, customs should ensure that thenecessary legislative and procedural frameworksare in place. Customs also needs to identify theresources required to implement these newassignments—human resources, technical infra-structure, and processes—and ensure that theseresources are available where needed.

Organizational Structure

Customs needs to consider how well its currentstructures match up to the new operating environ-ment and the enhanced security requirements ofthat new operating environment, without undulyhindering international trade. Ideally, this questionshould be considered within the context of theissues addressed during the strategic and opera-tional planning phases. Each customs administra-tion has a different range of responsibilities and adifferent configuration and relationship with othernational agencies. As such, the new demands placedupon customs with regard to security and facilita-tion and other national, regional, and internationalrequirements may suggest some organizationalrestructuring. To become effective in managingsecurity risks, for example, customs will need toperform risk-based management and assessmentprocesses in the early stages of shipment, beforeships or aircraft leave or arrive. It will also need tohandle large quantities of data and enhance its ana-lytical capabilities. There should be an ongoingmigration from the current control processes,which are performed at the time of the transaction,

The Role of Customs in Cargo Security 273

to working intelligently by using data that becomesavailable in advance of the arrival of cargo. Somecountries, such as Canada and the United States,have decided that a more drastic reorganization ofcustoms is required to enhance the close coopera-tion necessary to address the security concerns ofthe day. The United States has created a Depart-ment of Homeland Security that has absorbedcustoms.

Legislative Framework

Because customs administrations will be requiredto significantly alter their operating procedures tomanage risks in advance of shipment, there may bea consequent need for governments to review andamend their national legislative framework to pro-vide an adequate legal base. An existing legislativebase for the sharing of information, and interna-tional or bilateral agreements on security and facil-itation may have to be adjusted.

Access to Information

Because the new customs controls will be based oninformation relating to goods and people associ-ated with the supply chain, access to “real time”information from commercial operators and risk-based information from within customs and othergovernment agencies becomes an important issue.Customs administrations should review theirsources of information, data-handling capabilities,and legal protection provisions as part of a widerobjective to develop policies and strategies foraccess to commercial and governmental informa-tion to aid risk management processes.

Risk Management, Redeployment of Resources,and New Procedures

Modern customs practices and operations need tofully reflect the principles of risk management. Sofar, risk management has largely been used to dealwith existing customs’ priorities, such as the detec-tion of violations of legislation pertaining to valua-tion, origin, and so forth. Now that security hasbecome a major policy objective of customs, riskmanagement principles need to be applied to meetthis new concern.

In the context of security, risk analysis isrequired as early as possible in the supply chain, at

the time of loading of the container, or beforeexport, and before importation. In the future, riskassessment processes will be based on real-timeinformation, supplied by those business entitiesthat have ownership of the data, and sent via elec-tronic means to customs at import or export. All ofthese procedures will occur before the departure orarrival of the vessel so that security concerns can befully addressed and the vulnerabilities of the cargosupply chain taken into account. Electronicadvance cargo information has therefore become akey factor in managing security risks. Each of thecompanies contracted to facilitate the handling andmovement of cargo through its supply chain needsto be included in the risk analysis. The security pre-paredness of each of these companies has animpact on the level of risk associated with the over-all chain. This includes the companies involved inloading the container at the overseas warehouse,the truck company that transports the cargo to thewarehouse of the port terminal, terminal operators,the carrier, and the ports where the carrier stops enroute to its final destination.

Risk management can operate in any organiza-tion, can use manual or automated applications,and can be used for either strategic or tacticalpurposes. While the overall risk management prin-ciples remain the same for all customs agencies,each administration will need to develop and refineits individual risk management regime to meetnational and departmental objectives. Such anapproach has the potential to improve effectivenessand efficiency and can significantly help build theability to deploy resources toward the greatest areasof risk. Customs management should recognizethat implementing effective security-oriented riskmanagement implies a significant level of manage-ment attention. While the overall personnel levelsmay remain the same, many of the core activities ofthose staff members working within central policydivisions, as well as in regional and local offices, willbe affected. There will also be implications forfront-line control and enforcement units, intelli-gence capabilities, and the supporting infrastruc-ture, including legal, information technology, andtraining services.

There are multiple risks to be considered,including targeting of the carrier by terrorists, usingthe carrier to transport weapons of mass destruc-tion, or using it as a weapon to launch an attack on

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the destination country. Carriers can also be used todisrupt the infrastructure of a country. The risks tothe destination country include the use of cargo tosmuggle people or weapons or both, and the use ofcargo to transport conventional, nuclear, chemical,or biological weapons into the country. The risk tothe port itself is the potential loss of life or damageto property. In all cases, a terrorist incident createsthe possibility of trade disruption and high securitycosts.

The fact that customs administrations will beperforming many risk-based functions in advanceof shipment means that adjustments in customssystems and procedures will be required. Enhancedintelligence, dissemination of security relatedinformation, and decisionmaking processes willalso require consideration. Procedures to deal withsecurity risks need to address issues of detection(screening, analysis, and focus on high risk) anddeterrence (significantly reducing the terrorists’chances of success, and inducing them to investgreater efforts to achieve success). There is anadvantage to developing a modular risk-basedapproach in that some or all elements may beapplied according to needs and available resources.These elements include, visual and physical cargoinspection, document and manifest inspection,access control checkpoint, shipper and carrier con-trol, security personnel, integrity, and technicalcapacity. Examples of new procedures are con-tained in table 12.1.

Cooperation with Other Than NationalCustoms Partners

Transport security requires the cooperation of allpartners in the trade logistics network.

Business Partnership Security has always beenhigh on the list of traders’ concerns, because tradershave a commercial interest in secure trade prac-tices. Customs can greatly benefit from a close rela-tionship with the trading community. A large shareof trade is conducted among multinational enter-prises, which have tight logistics chains and system-atic approaches to ensuring the security of thosechains. The information provided through advancenotification can be used to enhance both securityand trade facilitation. Representatives of the inter-national and local Chambers of Commerce and of

the International Express Carriers Association areprime candidates for involvement in an ongoingdialogue.

National and International Cooperative Arrange-ments Customs is not the only agency responsi-ble for security; therefore, an efficient government-wide approach to security will involve manyagencies. A review of the cooperative arrangementsbetween customs and other relevant agencies, at thenational and international level, should be part ofthe overall strategy.

Intergovernmental and Internal CommunicationThe renewed concerns of security in trade havegiven rise to the emergence of international agree-ments and bilateral security initiatives. The situa-tion changes rapidly and the implementation ofregulations and practices also vary. Customs willneed to stay abreast of these changes and open for-mal and informal lines of communication with therelevant international agencies and trading partnercountries that develop such security initiatives.

Technical Means to AssistSecurity Checks

Security enforcement can draw on a number oftechniques that operate together and reinforce oneanother. This section focuses on how best to incor-porate the available security technology to improvecargo security (WCO 2003, U.S. GAO 2002b). Theaim is to allow maximum system performancewhile ensuring the smooth flow of cargo.

Effective security arrangements for goods andpassengers require that a central control point(CCP) be established to enforce mandatory passagefor all containers en route to and from the ship orplane and to ensure that all ships and planesundergo the prescribed security checks. The CCP isplaced at the entrance to the seaport, pier, or air-port to match the data to information that wasreceived in advance.12

A number of technologies have been identifiedfor cargo inspection. These techniques vary interms of their intrusiveness and their levels of

The Role of Customs in Cargo Security 275

12. The process for receiving this data from the shippers must beestablished beforehand.

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TABLE 12.1 Selected Operational Practices to Enhance Cargo Security

• Develop a known shipper database. • Make the database available to participating air carriers

and freight forwarders.• Define whether participation is voluntary.

• Allocate personnel for cargo inspectors.

• Require checks for individuals entering certain areas ofseaports and airports.

• Determine requirements for identity checks at cargo facilitiesthat are located off seaport or airport property according tothe security plans of the individual facilities.

• The use of technology such as smart cards can make thisprocess more efficient and reliable.

• Require background checks for certain airport workers.• Individual employers, in accordance with their security plans,

determine requirements for background checks on otherindividuals who convey and handle air cargo.

• Disseminate general threat information to the industry insecurity directives and information circulars.

• Require sea and air carriers that transport passengers to havesecurity programs.

• The use of security officers at cargo facilities is determined bythe individual facilities in accordance with their security plans.

• The use of physical barriers at cargo facilities is determined bythe individual facilities in accordance with their security plans.

Develop an industry-wide, computer-assisted cargo profiling system thatcan be integrated into air and seacarriers’ and freight forwarders’reservation and operating systems.

Improve the oversight of andenforcement pertaining to air andsea carriers and freight forwarders.

Use identification card systems toverify individuals authorized to entercargo-handling facilities.

Conduct background checks on allindividuals who convey and handlesea or air cargo and who haveaccess to cargo areas anddocumentation.

Collect and disseminate informationconcerning cargo security, includingthreat-related information, to seaand air carriers, forwarders, andgovernment agencies.

Establish written policies andprocedures and training programsfor the employees of companies thatconvey and handle cargo.

Employ a sufficient number ofqualified security officers at cargofacilities to provide physical security.

Use physical barriers (walls, fences) toguard against unauthorized accessto cargo areas.

Source: U.S. GAO 2002b.

Practice Comments

technical sophistication. They can be categorized asmanual and low-tech equipment, intrusive detec-tion technology (seals), and higher technologyequipment (radiation detection pagers, and X-rayand gamma ray scanners). Each technology has itssecurity-enhancing benefits as well as its potentialdrawbacks. Table 12.2 describes these technologiesand the potential costs, benefits, and drawbacksassociated with each. Some of the technologies arethen discussed in greater detail. These technologiescan be used for both air and sea cargo.

Manual and Low-Technology Approaches

The most important tool of any inspector is a sharpeye. To augment this tool in manual inspections,fiber-optic scopes, hydraulic jacks, wet and dry vac-uums, torches, magnesium arc cutters, chainsaws,drills, electronic stethoscopes, and many othercommon and specialized tools are used. It isunlikely that these tools differ greatly across theinternational arena.

Canines have been identified as one of the mosteffective tools to screen cargo, and their use has

TABLE 12.2 Technical Means to Assist Security Checks

Type of Technology Description Costs, Benefits, Drawbacks

Cost: Ranges from under US$50,000 per unit for trace orvapor detection and canine use to over US$10 million perunit for pulsed fast neutron analysis and certain X-rayequipment.

Benefit: Can indicate potential presence of threat objectswithout opening packages and containers; canines areconsidered the best means to screen air cargo becausethey have the fewest drawbacks.

Drawback: Some technologies (pulsed fast neutronanalysis, thermal neutron activation) can take an hour ormore per object to screen; some technologies (pulsed fastneutron analysis, bulk EDS) are very costly; some technolo-gies (X-ray, gamma ray) do not identify specific threat;some technologies (X-ray, gamma ray) cannot distinguishdifferent materials in high-density cargo; some technolo-gies (bulk EDS, pulsed fast neutron analysis) requirebuilding modifications to accommodate the equipment; alltechnologies have difficulty identifying biological threats.

Cost: Ranges from under US$1 per unit for tamper-evidenttape to US$2,500 per unit for electronic seals.

Benefit: Easy and inexpensive way to verify tamperingwith a container or other conveyance.

Drawback: All types of seals are known to be vulnerable totampering, given the appropriate tools, time, andopportunity. There is no worldwide standard for radiofrequency.

Cost: At least US$15,000 per unit.

Benefit: Designed to protect aircraft from catastrophicstructural damage or critical system failure caused by anin-flight explosion.

Drawback: Containers are expensive and heavy, whichresults in increased fuel costs.

Cost: About US$100 per unit for card reader devices; cardsare a few cents each.

Benefit: Ensures that only authorized persons are handlingcargo; creates a record of access to controlled areas.

Drawback: Does not protect cargo shipments from accessby persons who are authorized to access cargo andcargo-handling areas.

Cost: Ranges from about US$.50 per unit for bar coding toabout US$3,000 per unit for some radio frequency tags.

Benefit: Tracks the cargo throughout transport.

Drawback: Does not protect cargo shipments fromtampering; technology only tracks the location of cargo.

Cost: Ranges from about US$50 to about US$1,000 percamera; cost of additional components (switching andrecording devices) vary greatly.

Benefit: Improves cargo surveillance by reducing time andcosts.

Drawback: Video screens require continuous monitoring;does not protect cargo shipments from tampering.

Technologies capable of detectingexplosives and WMD, includingradioactive, chemical, andbiological agents. These include

• Gamma ray

• Pulsed fast neutron analysis

• Thermal neutron activation

• X-ray, including bulk EDS

• Radiation detection

• Trace detection

• Vapor detection

• Canine use

Technology that can be used todetermine whether a containeror conveyance has beentampered with by visualinspection, or that emits analarm, or notifies a centralcontrol station. Includes tamper-evident tape that shows “void”when tampered with, tamper-evident seals and lockingdevices, and electronic seals thatemit a radio signal when theyhave been tampered with.

Technology to harden cargocontainers to control thedamage caused by an explosionby confining it to the container.

Technologies to identify andauthenticate individuals orvehicles allowed into a restrictedarea, or to authenticate a driveror individual loading goods. Thistechnology includes picturebadges, biometrics, and “smartcards.”

Technology such as globalpositioning systems and barcodes that can be placed oncargo and used to identifyfreight being shipped or to trackthe shipment.

Video camera to monitor and storevideo images. CCTV can be usedto record the loading of acontainer onto the ship oraircraft and the container can beinspected by viewing thearchived video.

Technology toscreen objects forthreat

Seals and otherintrusiondetectiontechnology

Blast-hardenedcontainers (aircargo only)

Access control andauthentication

Tracking systems

CCTV

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

277

increased significantly in recent years. In additionto screening cargo, canine teams are used at sea-ports and airports to respond to suspicious eventssuch as bomb threats. According to the TSA, secu-rity experts, and industry officials, canine teamshave proven successful at detecting explosives andare the most promising method for screening cargo(U.S. GAO 2002a).

Intrusion-Detection Technology

Several technologies, including electronic seals andtamper-evident tape, could be used to help deter-mine whether cargo has been tampered with dur-ing its chain of custody from the point at which apackage is sealed by a known shipper to its place-ment on a ship or aircraft. An electronic seal (alsoknown as a radio seal), for example, is a radio fre-quency device that transmits shipment informationas it passes reader devices and indicates whether acontainer has been compromised.

Once security staff members are alerted to apossible problem, they can physically inspect thecargo. Seals range in cost from less than $1 per unitfor tamper-evident tape to $2,500 per unit for elec-tronic seals. Within the shipping industry, it is rec-ognized that first generation seals can easily betampered with, either by entering the cargo areawithout breaking the seal or by removing andreplacing the seal. Now there are more advancedseals on the market that report motion and reportany suspicious tampering exercise imposed on thecontainer. In any event, seals should be used in con-junction with other security procedures as part of acomprehensive security plan. Industry officialshave expressed concern about the use of electronicseals on aircraft because of the potential to interferewith avionics.

Modern Technology in the Service of Security

The high technology category includes radiationdetection pagers, trace explosives detection devices,X-ray scanners, and gamma-ray scanners.

Radiation detection pagers are specialist devicesused to detect the presence of radioactive materialthat may present a potential health hazard and maybe used in the production of weapons that dependon this material. Rogue nations or terrorist groupsare prime suspects for buying such material from

illicit traders. Radiation detection pagers are small,self-contained gamma radiation detectors that alertthe wearer to the proximity of radioactive materi-als. Such devices, developed particularly for the useof government agencies and emergency responders,are approximately the size of common messagingpagers. Radiation pagers are several hundred timesmore sensitive than commercially available Geiger-Muller tube-type detectors, which are of similarsize. Using such pagers, the authorities were able todetect in March 2001, radioactive material shippedthrough Uzbekistan en route to Pakistan. Futuredevelopments could include the installation ofradiation detection devices on quay cranes, gantrycranes, and other container-handling devices.

Trace explosives detection devices and bulkexplosives detection systems, which are currentlyused to screen passenger baggage for explosivematerial, can also be used to screen cargo containers.

Container Scanning Equipment

Container scanning equipment can increase thenumber of consignments that receive customsattention without causing undue delay, and canidentify illicit goods. The equipment requires alarge capital outlay, however, and the process ofintroducing it, from conception through operation,affects the entire control and intelligence sectorsand requires changes to the infrastructure and pro-cedures of customs. To justify the outlay, and toensure maximum return for the investment, it isnecessary to ensure that scanning equipment isused effectively and that it is fully integrated intothe risk assessment regime. The experience of cus-toms administrations that currently use it suggeststhat planning for the equipment’s introductionshould precede the purchase of the equipment.

The acquisition of scanning equipment shouldbe based on sound cost-benefit analysis. Costsinclude the capital, maintenance, and operationalcosts, while the benefits expected from the use ofthe scanner will depend on the specific objective forits introduction. Potential returns will, however,vary depending on the volume of traffic, its nature,and the assessed risk. For example, if the principalpurpose is to control revenue, the overall value oftraffic, the level of duty rates, and the projectedlevel of misdeclaration are necessary componentsof the analysis. If drug interdiction is the major

278 Customs Modernization Handbook

concern, the level of traffic from source countries isrelevant. Benefits will obviously be a function ofhow effectively and efficiently the equipmentdetects irregularities. This will depend on the rateof container inspection, which is likely to be fasterthan with manual inspection; the integration of theuse of the scanner with the availability of well-trained and experienced image analyzers; and theadequacy of the infrastructure for the equipment.Perhaps as important as those issues is the need toensure that the risk assessment infrastructure is inplace before introducing the equipment. Inherentwithin this is a requirement for pre-arrival data topermit the risk assessment procedures to take placein time to advise necessary parties that a given con-tainer has been selected for scanning. Good riskassessment practices require that a percentage ofcontainers be selected at random, as a control sam-ple to assist performance measurement of the riskassessment system.

Selection of the Appropriate System The pur-pose of container scanning equipment is to allowinspection of what is inside a container withoutopening the container; a process often called “non-intrusive examination.” There are a number of waysto achieve this objective, although most systems arebased on either X-ray or gamma ray technology.Whatever the energy source, it is governed both bythe laws of physics and by economics. Higher pene-tration of the contents of a container gives a betterquality of image but requires more energy, which ismore expensive; requires more operational space;provides less mobility; and must have higher levelsof protective shielding. Lower levels of penetrationhave a corresponding decrease in image quality andcost, but also have lower requirements for spaceand shielding, and provide greater mobility.Whichever type of system is selected, effective over-all operation, from a technical point of view, isdependent on all of the parts of the system beingeffective. This includes the emission unit, the detec-tion line, the linked computer system, and theimage interpretation software.

While both X-ray and gamma ray technologiesare available in fixed, relocatable, and mobile sys-tems, there are differences between the two, whichpertain largely to space and flexibility of use, as wellas to infrastructure requirements. Fixed units requirea purpose building with high walls, safety doors for

entrance and exit, facilities for computer equipmentand image interpretation, as well as sufficient spaceto accommodate the traffic flow. Vehicles must haveadequate access to the facility. Observers note thatthis may require 5,000–8,000 square meters. Mostfixed units are X-ray units. Mobile and relocatableunits provide greater flexibility, and can be used tosurprise traders that adjust their traffic pattern toavoid scanners. These units tend to be less powerfuland would depend on a good energy source (X-ray).These disadvantages could be a limiting factor;however, less fixed infrastructure would be requiredbecause units can be moved to where the trafficflow is.

To determine the most appropriate system forany administration, it is necessary to consider itsprincipal intended purpose. Revenue evasion sug-gests quantity differences between the goods andthe declaration. The better the image quality, themore likely any such difference would be identified.Some goods, such as raw materials, fruit, and veg-etables, and frozen foods, are denser than othersand would require the higher penetration rates ofX-rays. For drugs concealed in the fabric of a con-tainer, a system with a backscatter facility (in whichthe rays do not penetrate into the cargo but arescattered back from the walls) is beneficial,although it will have limited use apart from this. Ifprevention of human smuggling is a priority, lowerpenetration rates are preferable so as to avoid hurt-ing people. Some systems are designed to be highlyspecific. For example, using a system that identifiesthe presence of Potassium K40, a chemical compo-nent of cigarettes, can target cigarette smuggling.

X-Ray Inspection Systems X-ray based inspec-tion systems are the most common form of nonin-vasive inspection technology currently in use. Thepower source for X-ray systems is electrical, so thepower can be turned on and off. It also means thatin a site where the electricity supply is not certain, itis essential to have a back-up generator. X-raysdetect differences in material densities to producean image of the vehicle or container contents. Con-traband detection is actually performed by the sys-tem operator who visually inspects the X-rayimages for anomalies, sometimes with the help ofsophisticated software.

When cargo and contraband are of similardensities, contraband detection is difficult. For

The Role of Customs in Cargo Security 279

example, the density of a plantain appears exactlythe same as that of cocaine molded and painted toresemble a plantain when both are put through anX-ray machine. Density differences are projectedacross the entire width of the container; if a con-tainer is tightly packed, detection of contrabandmay be difficult, as the X-ray image will also becluttered and visually complex. In addition, due tothe projection methods, contraband could be hid-den in the shadow of a highly dense item of cargo.However, the use of multiple X-ray beams caneliminate most of the shadow effects. Due to thenature of X-ray methods, specific materials cannotbe identified; but it is possible with gamma ray sys-tems to detect specific materials like drugs andexplosives.

It generally takes X-ray systems only a few min-utes to scan a standard 40-foot container, whilesome of the more advanced systems take only sev-eral seconds. However, total inspection cycle timesmay range from 7 to 15 minutes or longer, due toimage analysis (which could result in scanning lessthan 100 containers per day).

Gamma Ray Inspection Systems Gamma rayinspection systems directly apply gamma rays, orfast-pulsed neutrons to generate gamma rays, thatproduce images of the container’s contents, three-dimensional mappings of content location, as wellas other important information. Gamma rays areproduced from natural isotopes such as Cesium-137or Cobalt-60. These are radioactive sources and theenergy emission is continuous. Because of this, theisotopes must be kept in a shielded cabinet at alltimes. Over time, the radioactive isotope’s emissiondecreases, and would need to be tested for effective-ness. A gamma ray unit is much smaller than anX-ray unit, giving it a higher degree of mobility. Thisfeature means that gamma ray units are far morelikely to be mobile than fixed.

Claiming many benefits over X-ray technology,gamma ray systems may be a key step toward moreefficient container inspection. Gamma ray systemscan scan standard 40-foot containers in a few sec-onds and result in a total inspection time of lessthan a minute. The average inspection throughputof gamma ray systems is more than 10 times greaterthan the fastest X-ray system.

Gamma ray systems can cost 3 to 20 timesless than X-ray systems in terms of initial capital

investment, four to five times less in terms of instal-lation, and when considering other benefits,gamma ray systems can yield a cost per inspectionthat is 50 times less than that of conventional X-raysystems. A downside is that gamma ray images aremore difficult to interpret and would thus requirebetter trained image analyzers.

Cost of the Scanning Equipment Fixed unitsoperate with the highest energy levels and are themost expensive. X-ray units tend to have higherpenetration levels than gamma ray units and areconsequently more expensive. Costs include thefollowing:

• Capital costs. Fixed costs include both the pur-chase of the equipment and the installation offixed equipment. Often new land needs to bepurchased and access roads and parking facili-ties need to be built.

• Maintenance costs. In light of the safety issuesinvolved in operating the scanners, adequatesafety requires periodic inspections of theequipment to ensure proper functioning.

• Operating costs. Containers need to be selected,released, and moved to the scanner and imagesneed to be made and interpreted. Staff membersneed to be trained.

Other Operational Considerations for the Use ofScanners The introduction of scanning equip-ment will have a significant effect on the customscontrol staff. They should be fully briefed on thenew procedures, and their justified health consider-ations should be addressed early on. Similarly, staffresponsible for risk assessment should be broughton board at the early stages of the process to ensurethat they have adjusted their procedures to the newtechnology.

Much is to be gained from involving the tradingcommunity in the early stages of preparations.They will need to be informed about the new pro-cedures, and assured that these procedures will notcause excessive clearance delays.

Port authorities should be made aware of theneed to facilitate the movement of containers. Portauthorities may be concerned about the additionalcost that new procedures would bring to port users,and whether this will affect the competitive posi-tion of the port.

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The use of scanners will interest other govern-ment agencies such as immigration, border police,and the nuclear agency. They should be kept abreastof developments.

Operational Conclusions

Despite additional security-related costs in all ofthe areas discussed in this chapter, the enhance-ment of cargo security in air and sea transport andshipping should ultimately benefit the countriesimplementing the measures described here. In anenvironment with greater security risks, such pre-cautionary measures should facilitate the flow oftrade worldwide, particularly to countries that havestrict security measures in place. Thus, it shouldprevent costly delays at the ports of destination andshorten the time to resume shipping operations inthe event of a large-scale incident.

Yet, the renewed attention to security issues isonly a few years old and the many initiatives thathave emerged still need to be confirmed and trans-lated into detailed operational guidelines andinstructions. The impact on trade is still somewhatuncertain. While it is desired that these new secu-rity measures contribute to trade facilitation, someobservers are not fully convinced. Some, particu-larly from the developing world, wonder how secu-rity screenings that are certified by importingcountries in some exporting countries but not inothers, will affect the competitiveness of these latterports and of the goods that pass through them.Some observers compare this situation with non-tariff barriers, certainly as long as the advantagesand disadvantages of complying with these securityregulations and guidelines are not clarified totraders (Raven 2004).

The use of new technologies such as scannersholds promise for assisting customs in achievingits main objectives. Promoters of this equipmenthave at times simplified the process and inflatedthe expected advantages for customs. Hence, cus-toms needs to exercise due diligence in decidingwhether to acquire the new technology and whattechnology to acquire. It is clear that the use ofthis technology does not provide a magic solution.Effective use of new technology will depend onseveral factors. Foremost, it requires that the useof the equipment take place in an environment ofactive risk management. It also depends on goodcooperation between customs and the port and

terminal authorities, as well as the availability ofinfrastructure and management to ensure asmooth flow of containers to the scanning unit.Staff must be trained and funding for mainte-nance and operation needs to be provided ontime. Monitoring of the results against clear per-formance indicators is also important. Neglect ofany one of these requirements will seriouslydetract from the results achieved and impederather than facilitate trade.

As with other elements of good customs opera-tions, success will depend largely on the commit-ment of port and customs leadership, the adher-ence of the staff to the impending changes inprocedures, the cooperation of the commercialcommunity (mostly exporters and shippers), andthe ability to tighten relationships with them. Portsshould establish supervision and control mecha-nisms for the security operation related to the portand customs, including the training and qualifica-tion of customs and port security personnel.

Annex 12.A Port Risk Assessment

The company or government agency operating theport facility (the port operator) is responsible forsetting security policies for the facility. Customsstaff will need to be intimately familiar with thesepolicies, and adjust their own operational policies.At a minimum, those policies must conform tointernational and domestic requirements. Yet, theyshould also reflect the port operator’s objectives inmaintaining safety and security on board its vessels,wherever they operate. This security concern will,by necessity, not be absolute because due consider-ation will need to be given to the delays it willimpose on trade transactions.

An effective port security system integratesinformation gathering, quality control procedures,personnel, and equipment, and enhances the abilityto respond to incidents appropriately and in atimely manner. Port Risk Assessment (PRA) mustcarefully consider the various possibilities and vari-ants of security risks, including damage to facilities,transport equipment, or cargo, and the use oftransport vehicles to smuggle persons or weapons,including nuclear material.13

The Role of Customs in Cargo Security 281

13. See International Maritime Organization ISPS code Website at www.imo.org/Newsroom/mainframe.asp?topic_id=583&doc _id=2689#code.

Methodology for Port Risk Assessment

The process of conducting a PRA should involve allwho are responsible in any way for maintainingsecurity at the port, as well as law enforcement andmilitary staff of the facility’s locale. The PRAshould address the particulars of the port facility;the types of ships, cargo, and passengers it serves;the locations from which cargo or passengers areaccepted; and the likelihood of various security-related scenarios and possible responses to thosescenarios.

The information should be collected andprocessed to produce a list of vulnerabilities to beused in the risk analysis. Today, new technologicalproducts provide automated tools to perform secu-rity assessments.

Elements of the Integrated Security System

The integrated security system is made up of variouselements.

Information and Intelligence To learn aboutpotential threats and discern changes and develop-ments in a timely manner, information must becollected on a continuous basis and incorporatedinto current security principles, to ensure that thesystem remains effective and appropriate. Animportant starting point would be a historicalanalysis of terrorist planning, organization,weapons, and tactics. Careful analysis should yieldreasonable, logical, and defensible assumptionsregarding possible capabilities. The informationshould be collected routinely through several dif-ferent channels, including through local and inter-national media sources, an incident database,national and international publications andresearch centers, international security initiatives,and cooperation with local and international secu-rity agencies. The information collected must beprocessed and analyzed, and the risk analysis andpreventive measures updated accordingly.

Personnel Personnel is the most important andmost sensitive element, due to the potential forhuman exposure to acts of malicious intent, andmust be handled accordingly. Customs staff shouldbe included in these personnel action programs.Such programs should cover recruitment, training,and inspections.

Recruitment of the most suitable candidate foreach function is vital to the success of the entireoperation, because security systems are too vulner-able to allow even the smallest breach. Initial stafftraining provides awareness, motivation, andknowledge, and might well be combined with real-life simulations to provide the experience of deal-ing with potentially dangerous situations and toensure the prevention of errors, shock, or panic inan actual emergency situation. Personnel and sys-tem inspections and drills should serve to ensurethat the highest possible level of professionalism ismaintained. All personnel employed at a facilityinvolved in the security process, whether directly orindirectly—including temporary employees whohave access to sensitive areas—must be carefullyscreened. A sampling of these employees should beinterviewed in the PRA.

Technical Means The most suitable equipmentto be used at a particular facility must be deter-mined, taking into account the equipment type,quantity required, and location. When selecting therequired equipment, the needs of the facility, thecosts, and the dependability of the equipment mustbe taken into consideration. An analysis should beperformed to examine the equipment in relation toall aspects of the integrated security system, includ-ing maintenance and operating costs, benefits, aswell as advantages and disadvantages. The selectedequipment must have a direct impact when prop-erly implemented. Such measures ensure a highlevel of security, and must always be supported byoperational procedures, training, and intelligence.

Procedures A set of routine and emergency pro-cedures covering the duties of security personnel,management, emergency service personnel, andcrews must be formulated. These procedures shouldalso outline the chain of command and the respon-sibilities of all involved parties, under both routineand emergency conditions. Each procedure willinclude definitions, methods (operational measuresand requirements), and responsibilities. The proce-dures should be prepared and approved by the localauthority, communicated to all relevant entities, andupdated periodically based on changing needs.

Control, Audit, and Drill Control and auditmechanisms must be established to continually

282 Customs Modernization Handbook

monitor the attentiveness, alertness, and effective-ness of the security system. The mechanisms willtake into account the types of operations of theport facility, personnel changes at the port facility,the types of ships served by the port facility, andother relevant circumstances and regulatory guide-lines. The results of these activities (simulations,surprise visits, and so forth) should be recordedand analyzed to establish a cycle of continuousfeedback and improvement.

Further Reading

International Maritime Organization. http://www.imo.org/home.asp.

The Subcommittee on Coast Guard and Maritime Transporta-tion Hearing on Interim Final Regulations on Port Security.www.house.gov/transportation/cgmt/.

U.S. Coast Guard. www.uscg.mil.U.S. Customs and Border Protection (CBP). http://www.cbp.

gov.U.S. Department of Homeland Security. www.dhs.gov.U.S. General Accounting Office. 2002. Container Security: Cur-

rent Efforts to Detect Nuclear Materials, New Initiatives, andChallenges. Statement of JayEtta Z. Hecker before the Sub-committee on National Security, Veteran’s Affairs, and Inter-national Relations, House Committee on GovernmentReform. Document GAO-03-297T. November 18, 2002.

U.S. Transportation Security Administration (TSA). www.tsa.gov.

References

EuropeanCommission.2004.“Commissionproposestostrengthensecurity inEuropeanports.”Brussels.europa.eu.int/.

European Union. 2002. Regulation (EC) No. 2320/2002 of theEuropean Parliament and of the Council of 16 December 2002establishing common rules in the field of civil aviation security(Text with EEA relevance)—Interinstitutional declaration.Official Journal L 355 of March 12, 2002. EU: Brussels.

International Civil Aviation Organization. 1944. Convention onInternational Civil Aviation. Chicago. December 7.

OECD (Organisation for Economic Co-operation and Develop-ment). 2003. “Security in Maritime Transport: Risk Factorsand Economic Impact.” Directorate for Science, Technologyand Industry, Maritime Transport Committee. Paris.

Pluta, Paul J. 2001.“Temporary Requirements for Notification ofArrival in U.S. Ports.” USCG News Media Advisory.United States Coast Guard. Federal Register, Volume 66,Number 193, Docket USCG-2001-10689, RIN 2115-AG24.October 4. Washington, D.C.

Raven, John. 2004. “Security’s Effect on Trade.” Journal of Com-merce. January 19–25, p. 38.

Sander, Charles. 2003. “Initiatives in Aviation Procedure.” Jour-nal of International Security. 13(11/12): 377.

TSA (Transportation Security Administration). 2003. “Air CargoStrategic Plan.” TSA Press Release, November 17. U.S.Department of Homeland Security. Washington, D.C.

U.S. Department of Homeland Security. 2003. “New Recom-mendations to Contribute to Improved Security in AirCargo.” Press Office. October 1. www.airportnet.org/depts/securitypolicy/DHScargoPR.pdf.

U.S. GAO (General Accounting Office). 2002a. Aviation Security:Vulnerabilities and Potential Improvements for the Air CargoSystem. Report to Congressional Requesters. DocumentGAO-03-344. December 2002.

U.S. GAO (General Accounting Office). 2002b. Container Secu-rity: Current Efforts to Detect Nuclear Materials, New Initia-tives, and Challenges. Statement of JayEtta Z. Hecker beforethe Subcommittee on National Security, Veteran’s Affairs, andInternational Relations, House Committee on GovernmentReform. Document GAO-03-297T. November 18, 2002.

WCO. 2003. “Container Scanning Equipment: Guidelines toMembers on Administrative Considerations of Purchase andOperation.” Secretariat Note. Brussels.

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285

13THE ROLE OF INFORMATION

TECHNOLOGY IN CUSTOMSMODERNIZATION

Luc De Wulf and Gerard McLinden

TABLE OF CONTENTS

The Role of Information and CommunicationsTechnology in Customs Modernization 286

Key Customs Computer Applications 289

Developing a Computerization Strategyfor Customs 292

Systems Options 295

Operational Conclusions 309

Further Reading 309

References 309

LIST OF TABLES

13.1 Customs Parameters and InformationTechnology Building Blocks 291

LIST OF FIGURES

13.1 Modern Customs Declaration ProcessingEnvironment 292

LIST OF BOXES

13.1 IT System Procurement and Costs: CaseStudy—Turkey 296

13.2 Morocco Case Study 298

13.3 Customs ICT Deployment Case Study:Turkey 302

13.4 Ghana Gateway ProjectCase Study 305

13.5 Senegal Case Study 306

The contributions of consultants Tony Mort and Alan Hall andof David Kloeden and Patricio Castro of the International Mon-etary Fund are recognized with gratitude.

Customs administrations today face a variety ofpolitical and administrative pressures and challenges.These include fluctuating workloads with static ordeclining resources, greater business expectations,and continuing pressures to meet often-conflictinggovernment revenue, trade facilitation, social protec-tion, and national security objectives. Moreover, cus-toms administrations are increasingly required tointegrate their systems and procedures with thesophisticated global logistics networks used by inter-

national trade and transport operators. To cope withthese pressures and challenges, the international cus-toms community looks to the applied use of infor-mation technology (IT) as a catalyst for improvingorganizational and operational efficiency and effec-tiveness. As a result, many modernization programsin the customs sector over the last decade have incor-porated significant computerization components.Many customs administrations today use varyingdegrees of automation to support core customs func-tions such as goods declaration processing, revenueassessment, revenue collection, risk management,and management reporting.

This chapter is not designed as a technical guidefor IT specialists, nor as a business process re-engineering guide. Rather, it summarizes the bene-fits of applied use of information and communica-tions technologies (ICT) in the customs sector, andthe important role ICT can play in the wider processof customs modernization and reform. The chapterdiscusses the advantages and disadvantages ofnationally built ICT solutions and briefly presentsthe various off-the-shelf solutions that are presentlyon the market. It draws on some important lessonslearned by a range of organizations, donors, con-sultants, and customs professionals, and emphasizeskey issues to be considered when developing appro-priate computerization strategies for the customsadministrations of developing economies.

The first section highlights the importance ofthe use of ICT for effective and efficient customsoperations. The second section focuses on the var-ious components of a computerized customsmanagement system. The third section presentsthe key points of a strategy for computerizationof customs. The fourth section briefly describesthe advantages and disadvantages of adoptingnational versus off-the-shelf customs manage-ment systems, and summarizes the major third-party products that are available. The final sectioncontains operational conclusions. Where possible,case studies have been incorporated to illustratepoints made.

The Role of Information andCommunications Technologyin Customs Modernization

While it is evident that IT is assuming an increas-ingly important role in modern customs adminis-tration, the priorities, expectations, experience,capabilities, and resources of individual customsadministrations vary considerably. Beginning inthe early 1970s, customs administrations of manydeveloped economies began to recognize the signif-icant advantages of using technology-based solu-tions to improve their operational efficiency. Theydesigned and developed their own customs com-puter systems, tailored to meet national needs.Over the years such systems have been enhanced,simplified, and in some respects standardized inline with international best practices. They wereadjusted over time to capitalize on changes in

information and communications technologies. Asa result, such countries have computer systems thatreflect modern customs management practicessuch as self assessment, clearance on minimuminformation, deferred payment of revenues, anintelligence-led and targeted risk managementapproach to clearance of international consign-ments, and sophisticated post-clearance auditregimes.

The historical experience with ICT of manydeveloping and emerging economies has beenquite different and not without significant diffi-culty and, in some cases, high financial cost. Lack-ing the necessary financial and human resourcesand access to a well-established domestic IT mar-ket, customs administrations of many developingcountries have been slow to take advantage of thefull potential offered by the appropriate applica-tion of modern technological advances. Fortu-nately, this situation has changed over recentdecades, partly as a result of the commercial avail-ability of customs-specific computer systems, andthe international donor community that hasstepped up support to strengthen customs admin-istrations. Yet, the technological infrastructureand support available in many developing coun-tries lags far behind that which is available inmore developed economies, and increasingly,behind the technology-intensive business prac-tices of many international traders. Moreover,when automated systems are introduced, they areoften not used to their full potential. At times, theCustoms Code requires the submission of paperdocuments for cargo clearance purposes, therebyduplicating information often provided to cus-toms electronically. More frequently though, cus-toms staff and management have been reluctant toimplement the processing simplification requiredby the new IT systems or to adjust workflow andstaff assignments accordingly. At times the ICTwas introduced without first streamlining, stan-dardizing, and simplifying existing manualprocesses and procedures. In such cases it is hardlysurprising that the implementation fails to meetbusiness expectations. Experience clearly showsthat the basic principle should be to first stan-dardize, consolidate, modernize, and simplifyprocesses and procedures before computerization.In the absence of such simplification, the ineffi-cient manual system may at best be replaced by an

286 Customs Modernization Handbook

inefficient computerized system, with no gain toanybody.

Designing new, simplified practices and pro-cesses inspired by international best practices thathave proven to reduce the compliance cost to thecommercial community may require changes ingovernment policy, in the legislative base, inthe application of human resources managementpolicies and procedures, and in the way cus-toms policies and procedures are applied. Giventhe possible implications of these changes, muchbenefit can be gained from securing political sup-port for the reform and full support from the gov-ernment and senior management of the customsadministration.

Customs often administers the value added tax(VAT) or similar consumption taxes. Hence, effec-tive VAT administration at the border should bedesigned along with effective customs managementpractices. Customs initiatives, such as de minimisvalues for declaration, deferred payment of rev-enues, clearance on minimum information, peri-odic goods declarations, tariff-free policies andduty-free imports, and so on have to be carefullyreviewed and integrated with any new VAT legisla-tion. It should be clear, therefore, that the IT systemshould be designed to support a systems-basedapproach to total revenue administration at borders.

The automation efforts for customs processesmust be cognizant of at least two key features ofmodern customs practices:

• Modern customs processes must be simple andtransparent but cannot be simplistic. This doesnot, however, prevent complex systems fromemerging, as customs needs to cope with a widerange of special issues, many of which pose con-siderable danger to revenue and other policyobjectives. For instance, some goods, importedunder suspense regimes on the grounds thatthey are not intended for home consumption,may be fraudulently diverted to the domesticmarket. This will require that special safeguardsbe provided.

• Modern customs processes are migrating fromphysical to post-clearance control, with substantialreliance on self-assessment by taxpayers. It isincreasingly recognized that the key to effectiverevenue administration is voluntary complianceby the taxpayer, and that the key to voluntary

compliance is self-assessment. In the customscontext, this means less emphasis on extensivephysical inspection at the point of entry astraders (or their agents) declare the revenuespayable—but with effective control exercisedafter goods have been cleared for free circula-tion. Post-clearance control will involve auditand other checks focused on addressing transac-tions in which the risk of incorrect declaration isgreatest. Clearly, this will require reliance on anintelligence-led and targeted risk managementapproach that isolates high risk consignments,or consignments of special interest. Appropri-ately designed computer modules can helpgreatly.

The Need to Integrate ICT in Customs with anOverall Modernization Program

In recognition of the pivotal role computerizationplays in modern customs administration, manycustoms reform programs have placed a high prior-ity on the selection and implementation of appro-priate and effective technological solutions. Indeed,donors have often allocated large percentages ofproject funds to the upgrading or replacement ofsuch computer systems. In recent years, however,there has been a growing acknowledgement of theproblems and limitations of fully technologically-dominant modernization strategies and of the needto integrate technology into a wider and more com-prehensive capacity-building effort across theentire organization.

A recent International Monetary Fund (IMF)publication (Corfmat and Castro 2003, pp. 119–120) addresses this issue and notes that “interna-tional experience has demonstrated that customsadministrations often find it difficult to imple-ment . . . complementary components of the mod-ernization effort [and that it is not difficult to findexamples] where inappropriate introduction anduse of computer systems have exacerbated existingproblems. In both developed and developing coun-tries a disturbing pattern has been observed inwhich investment in computer systems in customsdepartments has grown steadily, while the averagetime needed for the release of cargo still exceedsseveral days, with no clear improvement in assess-ments and detection of frauds.”

The Role of Information Technology in Customs Modernization 287

The stage at which each administration is cur-rently situated greatly influences both the IT solu-tions that might be appropriate and the range ofcomplementary reforms necessary to achieve sus-tainable improvements in overall corporate effec-tiveness. The three-stage typology presented byAppels and Struye de Swielande (1998) is instruc-tive in this respect.

In stage one, customs administrations concen-trate on the physical control of goods, relying heav-ily on high levels of physical examination and on thesubmission and inspection of paper-based docu-mentation. Where computerization is employed, itis usually only for processing goods declarationsand performing revenue assessments. Furthermore,the use of such systems is typically applied after thegoods have arrived in the country of import. Inmany cases, such systems merely replicate existingmanual processes and procedures. Customs officialstypically perform data entry functions after submis-sion of paper-based documentation, which is timeconsuming and can result in high error rates.Limited attention is often paid to researchand analysis of the trader population, and riskmanagement–based targeting of suspect consign-ments is often limited or nonexistent. The focus ison maximizing revenue yield and little attention isusually paid to developing trade facilitation initia-tives. Quite a few customs administrations in devel-oping and transition economies appear to be stageone countries.

In stage two, customs work emphasizes the col-lection and analysis of information, with deci-sions on admissibility, revenue assessment, andintervention made on a risk management basis.Such approaches require significantly moresophisticated IT infrastructure, both within cus-toms and within the wider trading community.Direct input of declarations by importers orcustoms brokers is often a feature of such systems,and there may also be a limited amount ofelectronic information exchanged with othergovernment agencies. Customs clearance of inter-national consignments is typically provided in atimely manner; the use of resource-intensivephysical inspections is often reduced, and concen-trated on trade transactions that represent thehighest revenue risk. Such an approach is typicallydesigned to strike a balance between physicalcontrol and trade facilitation. This description

characterizes the current situation in most devel-oped and middle-income countries.

In stage three, customs administrations rely heav-ily on information and accounting systems, and onfollowing the processes that constitute a trader’stotal activities. All information is exchanged elec-tronically, decisions on treatment of consignmentsare made on a risk management basis, and the com-pliance record of traders becomes a key considera-tion. The focus is on informed compliance, inter-vention by exception, and rationalization of servicedelivery (for example, the single window concept).Customs resources are moved from resource-intensive, low-value activities at the time of arrivalof the consignments, to low-resource, high-valueprearrival clearance and post event, systems-basedaudit activities. All customs administrations indeveloped economies are now working towardachieving these methods of operation.

Each stage in this evolutionary model requiresincreased use of IT combined with the adoption ofmodern administrative systems and procedures.However, while many countries have broadly fol-lowed this evolutionary process, progression fromone stage to the next is neither necessarily linearnor predetermined. The experience of many devel-oped economies is that the need to redevelop orimprove the functionality of computer systems typ-ically followed, or occurred simultaneously with,the adoption of new and more effective strategiesand working methods, such as those described instages two and three above. The key lesson here isthat automation must proceed as part of an overallmodernization strategy for the institution, andmust be accompanied by a range of complementaryreforms in all aspects of customs administration.However, it is clear from many country examplesthat IT can act as a catalyst for the simplification ofcustoms procedures for no other reason than that agood customs management system does not permitthe continuation of idiosyncratic and overlybureaucratic work procedures. This catalytic role ofICT can at times precede the modernization ofmany other aspects of customs, as was the case inBangladesh and Ghana (see box 13.4), and canachieve good results, if customs is ready to reflectthe new discipline in its work procedures. Even inthese circumstances, issues of sustainability need tobe addressed head-on, and may contribute to therealization that non-ICT aspects of customs need

288 Customs Modernization Handbook

to be dealt with to make the most of the possibili-ties offered by ICT. It should be clear that the use ofIT is not a panacea, nor should it be seen as an endin itself.

The appropriate technological infrastructurefor a given customs administration will depend ona number of factors, many of which are outsidethe direct control of the customs administrationitself. The World Economic Forum’s Global Infor-mation Technology Report 2003–2004 provides acomprehensive analysis of the ICT readiness ofindividual countries and regions (Dutta, Lanvin,and Paua 2004). It takes account of the environ-ment, readiness, and usage of information andtelecommunications technologies. The researchsuggests that a certain threshold needs to bereached before there can be effective usage of, andconsequent impact from, ICT. For customsadministrations the implications of this researchare particularly relevant. They do not necessarilyneed to employ the very latest and most sophisti-cated technological solutions available, but ratherthe ones that are most appropriate for their ownoperating environment, resource base, telecom-munications infrastructure, and realistic develop-ment ambitions. In other words, the solutionsshould be coordinated, relevant, appropriate, andachievable to meet national needs, given localconditions and resources. They should be afford-able and sustainable in the long-term, taking intoaccount resource obligations, resource availability,political and administrative will, and long-termsystem support, maintenance, and flexibility.Clearly, there is no “one size fits all” approach forimplementing IT in customs.

Summing Up: Benefits of Computerizationin Customs

Well-implemented computer systems linked tocomplementary improvements in customs prac-tices will result in the following:

• enhanced customs control over internationalconsignments

• improved control of exemptions, concessions,and duty suspension regimes

• reduced cargo clearance times for the dischargeof customs formalities

• closer cooperation and rationalization of activi-ties with other border control agencies

• uniform application of customs and otherborder-related legislation

• increased transparency and predictability for thebusiness sector

• reduced opportunity for inappropriate exerciseof officer discretion

• enhanced management information• more efficient revenue collection and

accounting• more accurate and timely trade statistics• more effective deployment of human and tech-

nical resources • more accurate information for risk management

and post-clearance audit purposes.

These benefits are further enhanced when it isdecided to leverage the pivotal role that a customsadministration plays in the entire internationaltrade cycle, to create an electronically connectedtrade community wherein all stakeholders aremembers. Conceptualizing and implementing sucha national approach to trade community develop-ment does not come spontaneously and requires aclear vision and political commitment that goeswell beyond customs. However, successful imple-mentation is possible,1 either as national systems oras local seaport or airport community systems,through significant cooperative efforts from allconcerned over many years.

Key Customs ComputerApplications

Many customs functions lend themselves to theapplication of technological solutions. The follow-ing areas are typically covered by customs-specificcomputer systems:

• inventory control of international cargoes• processing of goods declarations for release of

international cargoes• tariff and documentation control• determination and evaluation of customs value• control of goods in transit, entering warehous-

ing regimes, or imported under temporaryadmission

The Role of Information Technology in Customs Modernization 289

1. Such as in Chile, Singapore, Mauritius, the United States,Great Britain, Ireland, France, New Zealand, and Australia. Workis actively underway to introduce such systems in developingcountries such as Ghana, Saudi Arabia, and Senegal.

• management and discharge of inward process-ing or drawback regimes

• risk management (risk profiles, risk analysis,intelligence analysis)

• broker applications• management information systems• customs enforcement • revenue accounting• production and maintenance of trade statis-

tics and statistical analysis for identificationof unusual trading patterns worthy of closeranalysis.

Table 13.1 provides an overview of the customsprocesses and the ICT support that is normallybuilt into a customs management system. It sum-marizes the entry and exit points for the cargo, thepublic and private sector stakeholders involved, thecontrols required, the strategies typically employed,and the IT elements involved. Table 13.1 illustratesthe complexity of the task and the interdependenceof the various elements necessary to establish effec-tive ICT support for a modern customs administra-tion. Such systems result in faster processing ofgoods declarations, targeting of controls to specifictraders, improved revenue collection and control,data exchange, improved accuracy of data andaccounts, improved management information, andup-to-date statistics. All these, in turn, play a keyrole in supporting post-release control activities.

Figure 13.1 illustrates the concept of moderncustoms risk management practices in relationto the processing of international trade transac-tions. It shows the functions and processes that amodern computerized customs management sys-tem supports.

The typical goods declaration and processingenvironment as represented on the left of figure 13.1acts like a conveyor belt. Documentation for individ-ual consignments are lodged with customs andprocessed on a transaction-by-transaction basis.This is a repetitive, time-consuming, and mechanicalprocess. It also tends to be excessively control ori-ented if, as is the case for the majority of interna-tional trade transactions in mature countries, traderstend to be in compliance with established customsrequirements. To facilitate trade and more accuratelytarget deliberate revenue leakage, advanced ICT sys-tems can support customs administrations in themove toward an operational method based on risk

management principles. Under such a system, higherrisk consignments are identified through back-officecustoms activities relying on intelligence-led, riskmanagement–based analysis of historical customsdata. High-risk cargo is targeted and extracted fromthe normal processing path through use of an effec-tive selectivity mechanism. Such consignments maythen be subjected to full customs scrutiny includingextensive documentary or physical examination (orboth). Nonselected consignments are typicallyreleased with minimal scrutiny, as being of littleinterest to customs.

This targeted approach to cargo processingrepresents the frontline activity of modern cus-toms administrations. It is extensively supportedby, and reliant on, an effective feedback mecha-nism being in place to channel the results of post-release controls and systems-based audit strategiesback into the risk management mechanisms sothat profiles can be updated and risks continu-ously reassessed.

The post-release control and audit regime repre-sents the safety net for the entire facilitationapproach. It acknowledges that many aspects of cus-toms interest, such as valuation verification, fiscalevasion, smuggling, and customs fraud, cannot bedetected through examination of individual customsdeclarations. To uncover such indiscretions it is oftennecessary for customs to examine a trader’s entireinternational trading patterns, including the move-ments of foreign currency. This can only be achievedthrough systems-based auditing of the entirety of thetrader’s international trade transactions.

In addition to these computerized customsmanagement systems that assist in the clearance ofcargo, the customs administration, like many otherlarge organizations, also uses computer systemsand other technological advances to more effec-tively and efficiently manage the organization as awhole. This includes the use of technologies in sup-port of functions including the following:

• human resources management—payroll, careerdevelopment, personnel placement, vacancytracking, disciplinary processes, and effectiveuse of resources

• management information and executive sup-port systems

• asset and estate management• fleet management

290 Customs Modernization Handbook

The Role of Information Technology in Customs Modernization 291

TABLE 13.1 Customs Parameters and Information Technology Building Blocks

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

—Seaport—Airport—Border or

free zone—Inland

controlledarea

—Post office

—Shipping andairlinecompanies andagents

—Post office—Transport

companies andagents

—Port managers—Airport

managers—Free zone

managers—Importers—Exporters—Customs

brokers—Freight

forwarders—Warehouses—Other

regulatoryagencies(Immigration;Agriculture;Health; CulturalHeritage; Police;Central Bank)

—Banks —Ship or airline

crew—Drivers—Passengers—Entity

employees

Physical—Secure entry

and exit—Secure

movement—Secure storage—Inspection—Seizure

Information—Summary data

(manifest)—Clearance data

(bill of entry)—Verification

data(inspection,additional info.,audit)

Authorities to dealwith goods—To land (goods

and mode)—To move—To store or

unpack or breakbulk

—To treat ortransform

—To dispose

Information—Planned and

targeteddistribution ofinformation onlegal require-ments, policies,procedures,incentives,facilities, andsanctions

Facilitation tools—Gathering and

mobilizingknowledge

—Single regulatorywindowclearance fortransport mode,goods, andpassengers

—Prerelease ofcargo andpassengers

—Client accreditation

—Periodicdeclarations

—Advancedcustoms declarations

—Electronicprocessing,payment, andclearance

Control tools—Advanced cargo

and passengerinformation

—Internationalcustomscooperation

—Effective threatassessment (intelligenceservice)

—Risk managementand profiling

—Post-clearanceaudit

—Mobile inspectionand audit teams

Conveyance registers—Ships—Aircraft—Land transportReport (inward and outward)—Ship’s manifest—Aircraft manifest—Load list—Consolidations (including

couriers)—Passenger manifest—Crew list—Stores listLicenses and permissions By customs—Store—Move—Pack and unpack—Consolidate and deconsolidate—DisposeBy other parties—Reference data—Licenses—PermitsDeclaration regimes—Importation for home use —Exportation—Warehousing—Transit—Transshipment—Carriage of goods coastwise—Inward processing—Outward processing—Drawback—Processing of goods for home

use—Temporary admissionGoods declaration data—In accordance with WCO Data

Model and including datafields necessary for all agencyregulatory requirements

Results of physical (by inspection)and documentary (audit)verifications—Automated, online, real-time

input of results in standardizedformats

—Categories—Variations—Treatment (consequences)Intelligence profiles—Information that has been

analyzed, classified, andconverted into profiles fortargeting

Source: Hall, Alan. 2003. Prepared for this chapter.

• inventory management of consumable assets andgeneral logistics support for stores and supplies

• management and disposal of seizures• operational planning and resource allocation to

achieve tactical objectives• intelligence collection, analysis, and dissemina-

tion to frontline staff• audit planning and control, both internal and

external• physical examination of cargoes and persons, for

example, X-ray installations, body scanners,chemical analysis, and so forth

• technical support to customs laboratories• library management systems• technological tools and systems in support of

personnel development and instruction delivery• general office automation tools.

These applications are not directly related to cus-toms clearance, and before considering their intro-duction the administration should review its com-puterization strategy to decide whether to integratethese noncore functions into its computerizedclearance system. In many instances it is likely thatdeveloping separate ICT solutions for these non-core functions may be the best approach.

Developing a ComputerizationStrategy for Customs

Computerization is not an end in itself, only ameans that should lead to better customs operation.Computerization of customs processes is likely tobring about the full advantage of process improve-ments only if complemented by associated changes

292 Customs Modernization Handbook

Futureelectroniclodgment

Selective extraction andexamination of higher

risk shipments

Declarationprocessing

Uncover customs fraud and serious smuggling

Post-event audit capability

Valuation examination or inquiry

Classification determination

Risk management approach

Intelligence analysis

Targeted profiling

Input back into risk management regime

FIGURE 13.1 Modern Customs Declaration Processing Environment

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

to legislation, a review of organizational structuresand human resources management policies, revisedcargo clearance policies, and enhanced operationalprocedures. Failure to incorporate these associatedinstitutional reforms will prevent computerizationfrom fully achieving its role as a catalyst for change,to make customs operations both more effectiveand efficient. Note, however, that a careful introduc-tion of appropriate ICT solutions, even unaccompa-nied by the full range of customs modernizationfeatures mentioned here, can at times lead to thesimplification of clearance procedures, the accelera-tion of the clearance process itself, and the promo-tion of revenue mobilization.

The planning process must clearly identify thecapabilities and functions that IT will support inmeeting the immediate tactical needs and strategicgoals of the customs service and those of its otherstakeholders.

The process can be thought of as consisting offive stages:2

• becoming aware of a need for change in the useof ICT in customs

• setting up a steering committee that will overseeand manage the change

• planning—strategic, project, and businesscontinuity

• development planning that goes from detailedinvestigation and analysis of the current systemto implementation

• post implementation.

Awareness of the Need for Change

Nearly all customs administrations realize thateffective and efficient clearance of goods is a prior-ity and have over the years come to rely in varyingdegrees on ICT. However, the technology haschanged drastically over the last few years and thedemands of the trading community for more effi-cient and transparent customs services also havebecome more vocal. Examples of such technologi-cal changes are the increased facility and cost effi-ciency of using the World Wide Web, Direct TraderInput (DTI), Electronic Data Interchange (EDI),and electronic payments. The Revised Kyoto

Convention urges customs to adopt advanced ICT,and the World Customs Organization (WCO) hasperiodically organized ICT fairs at which vendorspresent their wares and that constitute a forum forcustoms officials of various countries to exchangeexperiences. Also, much of the need to change ICTsystems comes from the aging of the legacy systemsand the difficulty of maintaining them. In someinstances hardware platforms are no longer sup-ported by their vendors and maintenance hasbecome an extremely difficult and costly affair.

Reliance on a Steering Committee

It may take a steering committee to organize ICTreform. The steering committee’s task is to initiate,guide, and review any computer project within cus-toms. This committee should have representativesfrom the management of the various departmentsthat will be affected by the intended change. TheDirector General or Commissioner of Customsshould chair this committee, as it will deal withcore issues of customs control, revenues, and tradefacilitation—the three key objectives of the organi-zation. Also, the Ministry of Finance should be amember of this committee as the preparation andimplementation of the ICT solution will be costly,and because the sustainability of the ICT solutionwill require annual funding for upkeep andupgrading. At times, it may be advisable to have atechnical expert or external consultant on the com-mittee to advise the other members of the technicalissues. The steering committee will need to con-sider, at various stages in the process, what consul-tancy services to call upon to assist it in determin-ing a good strategy and in working out the detailsof the chosen ICT solution.

Planning

Good planning, at both the strategic and projectlevels, is crucial to the success of any IT program.

Strategic Planning The long-term computeriza-tion plan for the administration will be the result ofa strategic planning process. Such planning mustinclude the following steps:

• Determine the objectives and commitments ofcustoms—what are its strategic and tactical

The Role of Information Technology in Customs Modernization 293

2. This section is inspired by the WCO Revised Kyoto Conven-tion, General Annex Guidelines, Chapter 7 Application of Infor-mation Technology and Communication Technology, availableat www.wcoomd.com.

objectives in the areas of safety, trade facilita-tion, revenue mobilization, and so forth?

• Obtain a good understanding of the currentstate of the administration, operations, and sys-tems and technology infrastructure of customs.

• Assess how ready the organization, its staff, andthe trading community are to change the pres-ent way of doing customs business. Can theorganization change? Does it have the requiredstaff or can it acquire such expertise where it ismissing?

• Define the target state scenario. This will pro-vide a realistic and actionable transition objec-tive for modernization based on current capaci-ties, tactical readiness, and critical transitionrequirements as defined by the key stakeholdersand decision makers.

• Apply a gap analysis that will compare the targetstate and the current state so as to arrive at theCustoms ICT Modernization Strategic Plan. Theplan is a set of specific project recommenda-tions, the details of which will be worked out inthe project stage of the planning process.

Project Planning The Customs ModernizationPlan consists of a number of projects, each ofwhich will require individual planning and control.These projects may include detailed descriptions ofthe present processes, and may investigate whetherto go with an off-the-shelf solution or a nationalsolution, look into the human resources aspects ofthe greater reliance on ICT, investigate how the newsystem will be implemented without disrupting theongoing clearance processes, study how customs’business will be affected if the ICT system were tofail temporarily and how the impact of such fail-ures can be minimized. Funding and project leadersneed to be assigned. Project leaders should receive abudget and timetable and clear direction as to whowill be held responsible for what aspect of the pro-ject. Progress reports must be provided to the steer-ing committee, which should provide continuousguidance, clarify sequencing and dependencies, anddecide on the start of the development stage.

System Development Process

Depending on the solutions chosen by the steeringcommittee, the system development process stagewill require a detailed review of the existing

procedures, so as to instruct the detailed design ofthe new system. This will be the work of a systemsanalyst and should result in the preparation of aUser System Specification that describes the mainfeatures of the new system and how it will affectmanagement and staff. If the steering committeedecides to acquire an off-the-shelf solution, theUser System Specification will closely reflect that ofthe provider and will detail how customs will adaptor modify and add on to the processes proposed,and how this will affect processes, staff, and man-agement. If a made-to-order solution is agreedupon by the steering committee, the next step willbe to develop a specific system design. This speci-fies the computer and manual processing require-ments, the inputs to the system, the outputs of thesystem, the computer files used to store informa-tion, and the segmentation of the processes intoprogram design. Programming of the new proce-dures follows next. Care must be taken to fully doc-ument the exercise. A User Manual (for the customsofficers that will operate the system), an OperationsManual (for the IT department staff), and thechangeover instructions to ensure a smooth transi-tion from the old to the new system should also bereadied.

Procurement and Installation of Hardware, Soft-ware, and Communications Equipment Equip-ment and software procurement is normally under-taken in parallel with the system developmentprocess. The type of hardware to be procured needsto be tailored to the specific computing require-ments of the solution chosen. Proper procurementrules should be followed to ensure that customs getsvalue for its money. The World Bank has procure-ment guidelines that need to be followed when theproject relies on Bank funding (World Bank 2004).The Bank frequently updates these guidelines.Box 13.1 describes the procurement process forTurkey’s ICT project in customs, which compliedwith World Bank procurement guidelines. Theseguidelines should still be kept in mind even if pro-curement uses alternative internal or external fi-nancing, as these guidelines provide best practice toobtain value for money. The installation also needsto be carefully planned, as it involves site prepara-tion, staff training at the ICT center, and commu-nications planning, including the installation ofdata circuits, modems, and other communication

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infrastructure. The system will only be functionalonce fully tested in an operational environment.

Implementation of the New ICT System Once allthe ICT and complementary preparations are readyand the system has been satisfactorily tested, it istime to abandon the older processes and adopt thenew ones. There are various options for implement-ing this transition to the new system. One option isto run the new system in parallel with the old system,and compare the results. However, this implies thatthe staff is running two systems at the same time,which may be taxing. This is likely to be an optiononly for customs services that deal with a relativelysmall number of declarations per day, or can be doneon a pilot basis at a site with few declarations per day.The generalized transition then takes place when theeventual problems with the new system are ironedout. If testing was done in a comprehensive mannerthis should not take too long. The second option is toroll out the new system in a pilot site. The pilot sitecan be a smaller site, with less risk of disruption andgood back-up procedures. Airports are often used aspilot sites, as trade there is more streamlined and lessvaried than at major seaports and land border cross-ings. Trade documentation is often also of higherquality. With this option, the resource-intensivetraining of customs staff, traders, and brokers can bephased out over time. Success in the pilot site then isfollowed by gradual rollout to the other sites. Thethird option is to organize the transition from theold to the new system for a given day. In this case,solid testing and good preparation of a contingencyplan for major problems, or even breakdown, willpay off handsomely.

Post-Implementation Evaluation

Any good project cycle includes a thorough post-implementation evaluation, to verify that the initialobjectives of the project were attained and whetherthe cost estimates were realized. Obviously thisevaluation will only be completely valid if the pro-ject preparation phase clearly spelled out theexpected costs and benefits in terms of revenuemobilization, integrity, trade facilitation, and secu-rity. Customs staff and management as well as usersshould be associated with this evaluation. Theirobservations may serve to modify certain aspects ofthe new processes.

Systems Options

When considering the introduction of computeri-zation in any organization, there is always the basicquestion of developing the system in-house, out-sourcing development to a third party, or acquiringan existing system from the market. Each optionhas its advantages and disadvantages, depending onthe local business environment and the technologi-cal environment in which the organization oper-ates. Also, there is the question of whether the sys-tem will be solely a customs management system orwill have broader ambitions, such as electronicallyconnecting all members of the trading community.

As noted earlier, computerization is not anobjective in itself. It only makes sense if it serves as atool to support implementation of modern customsmanagement practices. To do this, the technologyshould fully take into account the practical realitiesof the local environment, resources, and capabili-ties. In particular it should be attuned to the sizeand scope of the customs function and the organi-zational capabilities to deliver and support. Thesolution must be coordinated, relevant, appropriate,affordable, and sustainable. There is no “one size fitsall” solution. This section discusses the advantagesand disadvantages of national IT systems, the off-the-shelf solutions, and the “beyond customs”systems. Given the rapid developments in the ITarena, this section provides only broad guidelinesand suggests that any decision on IT solutions care-fully consider all the options available. The sectionalso recommends that customs officials visit withneighboring customs organizations to learn fromtheir experiences in the selection and implementa-tion of the most appropriate system.

Occasionally the decision to automate customsprocesses is made by the government within thecontext of a wider information and communica-tions strategy for the public sector. This may nar-row the options available to customs, yet it opensthe way for substantial synergy and crossfertiliza-tion. This will be particularly important if theobjective of the government’s ICT strategy is toconnect the various members of the trading com-munity electronically.

Developing an In-House IT System

Developing an in-house system, whether throughuse of existing resources or through an outsourcing

The Role of Information Technology in Customs Modernization 295

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

A major customs IT modernization project canbe a complex, multiyear, and costly exercise.First, a choice needs to be made either to adoptand customize a package to local requirementsor to try bespoke development. In addition tothe question of applications software, manymore decisions are needed, including choices ofdatabase, operating system, hardware, network-ing, training, transitional arrangements forsystem deployment, and follow-on support.Turkey’s experience is useful in terms of its com-plexity, timeframe, and compliance with WorldBank procurement requirements, which can beextrapolated to other sources of funding ornational circumstances. Although several yearsand much effort were expended in Turkey, theresults were impressive and have been sus-tained.

Software selection. Given the poor results fromprior attempts to develop their own systems,Turkish customs decided upon a package. Twooptions were available in the mid-1990s, andthe authorities chose SOFIX over ASYCUDA, pri-marily because the source code that allowed forsubsequent enhancement of the software wasprovided. The application, its customization(including translation to Turkish), transfer of“know-how,” plus hardware, facilities, and sup-port for pilot implementation were provided at acost of US$6 million under a contract with aconsortium of French customs and the French ITfirm, Bull S.A. Support and funding were pro-vided by the French government, but with sub-sequent system rollout dependent on WorldBank financing, and technical assistance fromthe IMF.

System deployment. Plans required SOFIX tobe deployed to 50 sites spread across Turkey, ofwhich six sites had heavy transaction volumes,12 were medium-volume sites, and the rest hadmore moderate traffic. Concurrent with prepara-tions to pilot implementation of SOFIX at thebusy Istanbul airport site, a two-year procure-ment process was undertaken to ensure that themost capable, and best value-for-money vendorwas chosen to deploy SOFIX under a turnkeycontract that covered a multiplicity of extra serv-ices and goods. The original selection of SOFIXwas conditional upon open competition in theaward of the deployment contract, which wasexpected to cost around US$40 million.

Prequalification of deployment bidders. A pre-qualification exercise was undertaken to limitbidders to those firms who could demonstratethe wherewithal and experience to successfully

complete such a contract. Six out of seven appli-cants were prequalified following a yearlongprocess that ideally should have been completedin half the time. All but one of the applicantswere multinational IT firms, with the exceptionbeing a Turkish conglomerate (and eventualwinner) that was the agent for a United Stateshardware manufacturer.

The deployment contract required 50 cus-toms sites to be equipped with hardware andfacilities, construction of a national network link-ing all the sites, plus a new national center, witha sophisticated data warehouse. The successfullypiloted SOFIX system had to be ported to theUNIX platforms offered by the bidder, and thecontractor had to complete a massive trainingexercise covering thousands of customs officialsand traders. Of the US$40 million budgeted, thefollowing breakdown of costs was anticipated:55 percent for hardware, 20 percent for services,13 percent for training and implementation, and12 percent for additional system and applicationsoftware.

Two-phase bidding process. In phase one, bidswere made against the clearly defined require-ments, but without prices. Of the six qualifiedbidders, four submitted bids; one bid was madejointly by two qualified firms, and one bidderdropped out. All bids were judged acceptable,so all bidders were given a chance to rectify defi-ciencies that were identified to ensure full com-pliance at phase two.

In phase two, updated and corrected techni-cal proposals were submitted, including fullcostings. Bids were subjected to a thoroughtechnical evaluation and scoring that resulted inthe award of a contract for around US$28 mil-lion, a substantial saving over anticipated costs.The contract required delivery of all goods andservices over 30 months in five batches, withseveral implementation teams operating concur-rently around Turkey in conjunction with a mas-sive training and change management exercise.Given the complexity of monitoring the primevendor’s performance against the contractterms, a separate contract was awarded to anindependent third party to verify compliance ofthe prime contract and to ensure systems, facili-ties, and hardware were fully integrated, andall services and goods were to the requiredstandards.

Source: David Kloeden, Note prepared for thisstudy.

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arrangement, has certain advantages—such sys-tems can more easily meet specific needs of theindividual customs administration, future modifi-cations can be prioritized and controlled internally,and customs has full control over the computersoftware. Some countries initiated their own ICTsystems early on, at a time when the most readilyavailable system at that time (ASYCUDA) was stillnot the powerful system it is at present, and did notsatisfy the country-specific ambitions and require-ments of the time. For instance, Morocco, wheremanaging the temporary admission system wasimportant as early as the early 1980s, chose todevelop its own ICT system gradually, fully takingconcerns regarding temporary admission intoaccount. When that system became increasinglyobsolete, the solution was to build on to the exist-ing system rather than go for an outside solution,which, in the minds of the policymakers wouldhave involved changes they were not ready to make.Developing an in-house system has the additionaladvantage that it may strengthen the local expertisethat can be drawn upon later to support the long-term sustainability of the system. Whether localICT capacity will be built up depends greatly on thequality of the local staff that can be attracted to theproject and how it is integrated into the externalteams that are often called in to develop the ICTsystem.3 In the case of Morocco, the local customsstaff is fully integrated into the foreign consultantteam, holding good promise for the ability of cus-toms to maintain and further develop the systemonce it is handed over to them. (See box 13.2.) Insome other countries, the national customs organi-zation has not been able to attract expert IT staff(largely because of its inability to provide attractiveand competitive compensation packages) and hasto rely on local ICT consultants. Obviously, as theirexperience is outside customs and tends to rest inindividual expertise, this approach does not pro-vide the same assurance for the future availabilityof these resources to maintain and upgrade the sys-tem once the project is completed. Also, ICT staff in

customs have frequently been attracted by lucrativecareer prospects outside customs, depriving cus-toms of the in-house expertise. In Uruguay, the ICTsystem (LUCIA) was built from the ground upthrough a joint effort between customs and a localsoftware firm. Uruguay customs relied heavily onthe support of staff from Peruvian customs, whichhad implemented an in-house system in the early1990s. The project used the functional specificationsof the Peruvian system, adapted to the needs ofUruguay and to the local and regional norms andregulations, as the starting point for defining the sys-tem requirements. The system was gradually imple-mented (during 1998–99) throughout the countryfor all customs operations and is operated jointly bycustoms and the Broker’s Association. Maintenanceand support is outsourced. Uruguay customs ispleased with the system, and relies heavily on it tosupport its control strategy. The user community isalso satisfied with the system, which they refer toas reliable and easy to use. The Senegal case study(box 13.5) also contains some interesting features ofbuilding a national solution to computerized cus-toms management, particularly as it has ambitionsof connecting to other members of the tradingcommunity.

Experience has also shown that customs man-agers at times underestimate the complexity of pro-gramming the various modules of the integratedcustoms processes and overestimate their capacityeither to adapt an off-the-shelf system to their ownneeds or to create a new system that reflects thenational preferences. It has often not been easy forcustoms technical experts to communicate thesecomplexities to the ICT experts, causing imple-mentation delays and cost overruns. Also, if theseoperational requirements are not well specified andinternalized in the customs management system atthe outset, it becomes difficult to retrofit them.

Designing national systems tends to be expen-sive and substantial cost overruns are frequent.Customs managers should carefully review theadvantages and disadvantages of trying to “reinventthe wheel.” Given the number of negative case stud-ies to date in developing in-house systems, there ismuch to be gained from carefully studying thegeneric software products currently on the market,and to review in a flexible and critical manner howto acquire the specific functionality not present inthose products. After wide consultation with

3. In the case of Russia, given the extensive professional invest-ment within customs, the customs administration chose todevelop and maintain many of their computer systems in-house.This is acknowledged in the current Bank-funded initiative forcustoms reform, while at the same time various other elementsof their reform program are testing the market through consul-tancy support for specialist assistance in key areas.

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BOX 13.2 Morocco Case Study

In the 1970s, Morocco implemented computersupport for the management of special importregimes—it was not much more than mecha-nized accounting support. In 1992, customsrolled out an in-house system that improved cus-toms clearance, but fell short of meeting all ofcustoms’ business needs and was not responsiveto the rapidly changing needs of its users. Somekey customs activities were only partially com-puterized, and others were not covered at all.

In the mid-1990s, customs became increas-ingly aware of the shortcomings of SADOC (thecomputerized support system for customs clear-ance) and undertook an in-depth assessment ofSADOC, and reviewed the future requirementsand the design of operational models reflectingthe new customs environment. This led to the1999 Customs Computerization Master Planthat proposed to (a) consolidate the SADOC sys-tem to ensure continuity of computer supportfor customs clearances, (b) totally overhaulSADOC to bring it in line with the requirementsof a modern customs organization and the latesttechnologies, including an advanced electroniccommerce–based environment, and (c) build adata warehouse that would support manage-ment decisions as well as risk analysis.

Morocco investigated options of changingover to an off-the-shelf system, namely ASY-CUDA, and eventually chose to build on theSADOC system. This decision largely stemmedfrom three issues: customs’ desire for strongmodules to manage temporary admissions andpayments in dispute, which they viewed as notfully developed in the ASYCUDA system; theirbelief that ASYCUDA was not sufficiently testedin large countries with a complex set of tradeprocedures and regimes; and Morocco’s reluc-tance to enter into a dependency relationshipwith the UN Conference on Trade and Develop-ment (UNCTAD) regarding operational supportand maintenance of the software. The govern-ment wanted to develop the computer skillswithin Morocco, at the customs department aswell as at local consulting firms. The fact that thein-house system was a national IT solution con-vinced some to favor it.

The Master Plan called for transitional imple-mentation, including a five-year migration to anopen standard operating environment (UNIX)that combined robustness, transparency, and

amenability to upgrades. The responsibility forconsolidating the existing systems to ensure bet-ter customs services in the transitional period wasgiven to customs. To do this, customs strength-ened its own computer management and devel-opment capacity by retraining its computer pro-grammers and recruiting several computerscientists. Emphasis was placed on ensuring thenew systems would be responsive to the needs ofits customers and improving the quality of sys-tem support, with revised procedures, standard-ized operations, and documentation of changes.

The development and implementation of atotally new customs management systeminvolved the following:

• the preparation of a detailed description ofthe various functions of the new system andan estimate of the development and imple-mentation costs

• the preparation of a detailed study of the newIT system, taking recommendations of usersinto account

• project preparation that involved a detailedstudy of system requirements for the newcomputer network system, front-end hard-ware and software for customs brokers andimporters, as well as system requirements atthe customs clearance locations and head-quarters, and the development of all func-tional modules of the new system and the testplatform

• detailing the implementation requirements,including process changes and staff training

• gradual rollout, with modules launched one ata time over the total territory of the country.

Staff and clients were exposed to intensivetraining before the rollout of each stage toensure smooth adoption. This rollout processalso permitted full and thorough testing of thesystem in all its application environments.

The financing of the preparatory studies aswell as the required investments were fullyborne by the investment budget of customsthrough the Ministry of Finance, in contrast tomany other computerization initiatives by cus-toms administrations that rely heavily on outsidefinancing sources and technical assistance.

Source: Steenlandt and De Wulf 2004.

practitioners in the field, the authors find that thereis a presumption in favor of off-the-shelf solutions.

Adopting an Off-the-Shelf Solution

There are a number of existing and emerging cus-toms management computer systems availabletoday on the market. All have a core of similarmodules that permit customs to manage its cus-toms clearance operations using computer andcommunications-supported modules. Not all ofthese solutions have the same modules and some ofthem have been more widely tested in the marketthan others. It is not the intention here to list thefunctionality of each available system and comparethem to each other. The products on the marketevolve rapidly and current details can be found onthe respective Web sites for each product. This list isalso not intended to be exhaustive as new productsare emerging on a regular basis. The Bank retainsits neutrality with regard to these products, in linewith its established procurement rules.

Note that many of the off-the-shelf packages donot provide all the necessary modules a countrymight want to use, or provide modules that arenot as well defined and articulated as particularcountry objectives and circumstances warrant.This should not necessarily lead to rejection of theseoff-the-shelf solutions in favor of a national solu-tion because most off-the-shelf solutions aredesigned with the capacity to interface with special-ized add-on modules that can be custom tailored toadequately respond to national objectives. Examplesof such add-on modules are the selectivity modulesthat are presently made available by a number ofpreshipment inspection (PSI) companies. Anotherexample is derived from the implementation ofASYCUDA in Bangladesh, where an externalcontractor was recruited to prepare four country-specific advanced modules: risk analysis, manage-ment information system, bonds and warehouses,and drawback system. What can be learned from theBangladesh exercise, financed by a Bank credit, isthat the preparation of these modules needs to becarefully dovetailed with the main customs manage-ment system itself and that to be fully operational,these add-ons require the same attention to stafftraining, infrastructure changes, and modificationof workflow and staff assignments as the main com-puterized customs management system.

ASYCUDA The UNCTAD ASYCUDA (Auto-mated System for Customs Data) Program4 wasdeveloped in the early 1980s to automate the oper-ations of customs administrations. It is presentlyinstalled in 84 countries. The program was devel-oped to support customs administrations in theirobjective of trade facilitation and efficiency of cus-toms clearance control. The program is provided atno cost, which means that countries do not pay forthe software development costs. Countries do pay,however, for the system implementation that isundertaken by the UNCTAD Technical Assistanceproject. The implementation comprises generalsupport activities, training, documentation, anddevelopment of specific support on a cost recovery(nonprofit) basis. In line with agreements betweenthe UN and the international donor (UNDP or theEuropean Commission, for example) and the UNguidelines in this matter, UNCTAD is limited to amarkup of 7–13 percent over cost.5 This markupcan be partially used by the ASYCUDA Program tofinance further development. UNCTAD has devel-oped three versions of ASYCUDA so far and is cur-rently rolling out ASYCUDAWorld.

• ASYCUDA Version 1 (1981–84). ASYCUDA Ver-sion 1 operated on early personal computers(PCs). Created at the invitation of the EconomicCommunity of West African States (ECOWAS)Secretariat, its main achievement was to assist inthe preparation of trade balances and otherrelated trade statistics. Implemented in threecountries, it demonstrated that computerizedcustoms clearance systems could be developedon low-cost computers.

• ASYCUDA Version 2 (1985–95). ASYCUDA Ver-sion 2 took advantage of the availability of newprogramming languages and new operatingsystems for PCs. This version introduced LocalArea Network computing in hundreds of cus-toms offices, allowing for a comprehensive inte-gration of functionalities. Initially running onthe only multitasking operating system (PRO-LOGUE) available on the market, ASYCUDAVersion 2 was, over the years, overhauled by theUNIX operating system, opening the way to

The Role of Information Technology in Customs Modernization 299

4. See the ASYCUDA Web site at www.asycuda.org/.

5. This markup is modest compared with development expensesin commercial software ventures.

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high transaction volumes and, consequently,ASYCUDA implementations in large customsoffices. UNCTAD does not develop its function-ality anymore. It was introduced in 40 countriesand still operates in 15 countries that have notyet migrated to ASYCUDA++.

• ASYCUDA++ (1992–present). ASYCUDA++ isbased on real client-server architecture, takesadvantage of the power of object-oriented pro-gramming languages and uses the potential ofrelational database systems such as Oracle andInformix. From a technical standpoint, ASY-CUDA++ is an advanced customs informationsystem that integrates a number of modern androbust technologies.6 ASYCUDA++ built on thefull suite of customs modules provided in ASY-CUDA Version 2, and added more customsfunctionality, particularly in the areas of DirectTrader Input, risk management, and transitmonitoring. ASYCUDA++ client computersfeature a text-based, multiwindow user inter-face. The most common operating systems onASYCUDA++ client computers are MS/Windows 9x and MS/Windows XP. TheASYCUDA Program has incorporated the com-plementary use of another generation of tech-nological tools and the emergence of the widelyused Internet environment. A first outcome ofthis work is that the current version ofASYCUDA++ allows customs brokers to sub-mit declarations through the Internet. TheASYCUDA++ EU Version is currently opera-tional in four European countries that becamemembers of the EU in May 2004—Estonia,Latvia, Lithuania, and Slovakia.

• ASYCUDAWorld. ASYCUDAWorld is UNCTAD’ssolution for e-customs. The development of thissystem began in 1999 and a first roll out (inMoldova) was undertaken in early 2004. It allowscustoms administrations and traders to handlemost of their transactions—from cargo manifestsand transit documents to customs declarations—via the Internet. Its platform is based on a sophisti-cated technical architecture that does away withthe need to maintain permanent connectionwith a national server—something that is espe-cially important for countries with unreliable

telecommunications. Where telecommunicationsare more reliable, the traditional World Wide Webapproach can be used. ASYCUDAWorld can workwith all major database management systems(including Oracle, Sybase, DB2, Informix, SQLServer) and most operating systems (Linux,Solaris, HP-UX, AIX, and MS/ Windows). Theplatform’s use of XML (extensible mark-up lan-guage) allows the exchange of any documentinside and outside the system, between customsadministrations and traders and between customsadministrations in different countries. It is “Java-native,” meaning that it was designed as an openstandard to be used with Java and that countriescan thus modify and extend the system withoutrequesting assistance from UNCTAD. It imple-ments the concept of “e-documents” that, onceplugged into the ASYCUDAWorld platform,reflect in the IT world the paper documents usedcurrently and implement the required businessprocesses. ASYCUDAWorld is being developedto coexist with and operate in the environmentof ASYCUDA++. Each beneficiary country candecide when to implement ASYCUDAWorldaccording to its technical decision and availablefinancial resources.

Trade Information Management System TradeInformation Management System7 (TIMS) is aproduct of Crown Agents. It is a software packageaimed at supporting and sustaining the efficientday-to-day operation of a modern customs depart-ment and consists of a full declaration system aswell as stand-alone or integrated support modules.The Declaration system includes the usual mod-ules, such as manifest handling and acquittal, dataentry, tariff management, receipt and validation ofSingle Administrative Documents, accounting, andtrade and revenue reporting. The stand-alone orintegrated modules include intelligence handlingsystems, risk management, price referencing sup-port in accordance with GATT regulations, transitcontrol, exemptions management, and manage-ment information. The system is modular indesign. It can be installed gradually, or some mod-ules can be used in combination with other cus-toms management systems. The system can be

6. UNIX servers, Windows 9x/2000/XP clients, Internet Proto-col, and so on. 7. See the Crown Agents Web site at www.crownagents.com/.

The Role of Information Technology in Customs Modernization 301

implemented in environments with limited oradvanced levels of communications capability andcan grow to maximize the benefits as more sophis-ticated technology becomes available. The fullTIMS has been installed in Mozambique andAngola, in conjunction with the management con-tract that Crown Agents has with customs in thesetwo countries. Partial rollout has been undertakenin, among other countries, Bulgaria and Kosovo.

All TIMS functions are structured using localand central (or regional) modules with EDI facili-ties allowing the transfer of data. Where it is possi-ble to take advantage of a wide area network, TIMScan be implemented in the distributed mode as aresult of its modern two-tier database architecture.TIMS was developed using an open system technol-ogy. The underlying database is ORACLE. TIMS isavailable on any UNIX or Microsoft Windows 2000or XP platform.

SOFI and SOFIX The Solutions Françaises Infor-matiques (SOFI) system was developed by Frenchcustoms and became operational in 1974. Designedto run in a mainframe environment, it was firstrolled out at the airports of Paris and was graduallyextended to all Custom Houses in France. The orig-inal system went through several upgrades andredesigns, and is still in operation today.

Several attempts were made at creating anexport version, and systems based on the SOFI con-cept but still under proprietary mainframe operat-ing systems were successfully rolled out in Egyptand Côte d’Ivoire in the early 1980s. With thearrival of the open systems concept and the consol-idation of the UNIX operating system, in the early1990s French customs decided to support thedevelopment of SOFIX (SOFI under UNIX), bothas a replacement for SOFI for their own use, and tooffer the system to other countries. The develop-ment was undertaken through a joint venture withseveral French hardware and software companies.The idea was to offer the system as an open codeproduct, with a small kernel around which differentmodules covering the main customs functions wereorganized. One of the premises of this approachwas that the system could easily be adjusted to localrequirements.

In the end, SOFIX was never implemented atFrench customs. Attempts to roll it out in Gabonand New Caledonia were abandoned as well due to

various reasons. In Turkey, however, the local adap-tation of SOFIX was undertaken with success (box13.3) and is still operational. Another version ofSOFIX was adapted to the requirements ofArgentina, where it was rolled out in 1993, and wassubsequently adapted for implementation inParaguay in 1995. Up-to-date versions are still inuse in both countries. A simplified version was alsoimplemented in 1999 in French Polynesia (Tahiti)and is still operational.

SOFIX implementation is no longer directlysupported by French customs. However, a consul-tancy firm (Solutions Informatiques Françaises[SIF], one of the original partners in the joint ven-ture) continues to support SOFIX and its deriva-tives in Argentina, Paraguay, and French Polynesiaand is actively interested in applying its expertise inother countries.8

SIF is currently rolling out a new Web-basedversion of SOFIX, called SOFIWEB. SOFIWEB isfunctionally equivalent to the current version ofSOFIX, and benefits from the use of J2EE technol-ogy and object-oriented development and imple-mentation tools.

TATIS TATIS9 provides IT-enabled customs solu-tions to customs administrations globally. Thesesolutions are marketed, delivered, and supportedby TATIS’ business partners, Hewlett-Packard,Pricewaterhouse Coopers, and Société Générale deSurveillance, in combination or individually. Thescope of the product range extends from auto-mated declaration processing through to manage-ment of suspense regimes, such as transit, and iscompleted by compliance and enforcement solu-tions with risk and valuation systems as well asinspection and workflow management. These solu-tions include guarantee management, covering riskmanagement, claims administration, financialclearing, insurance and guarantee placement forduty suspense regimes; and extend beyond customsto include financial institutions, operators, andtraders. These applications can function independ-ently or as an integrated suite.

The solutions are along the lines of the RevisedKyoto Convention and are consistent with the

8. See the SIF Web site at www.sifamerica.com/html/inicio.asp.

9. See the TATIS Web site at www.tatis.com/solutions/index.html.

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BOX 13.3 Customs ICT Deployment Case Study: Turkey

In January 1996, Turkey entered into a CustomsUnion with the EU and worked as early as 1993on the modernization of its customs organiza-tion. The World Bank supported this initiativewith a Public Financial Management Project loanof US$62 million (US$48 million for customs).Between 1996 and 1999, IMF technical assis-tance advisors worked with Turkish customs toimplement modern, up-to-date customs legisla-tion, simplify and automate customs proce-dures, introduce greater reliance on post-releasecontrols and reduce inspection rates and releasetimes, provide good service to the trade com-munity, and delegate increased responsibilitiesto regional and local offices.

ICT Strategy. A multifaceted approach wasnecessary to tackle the many reform challenges,although often the momentum was focused onICT. Previously, ICT support was relativelyinsignificant, limited to trade statistics genera-tion and minor usage of an in-house developedlegacy clearance system. To save time and cost,and to minimize implementation risks, cus-tomization of a package was chosen rather thanbespoke development of a new system. Eigh-teen months of intensive work was needed tocustomize a software package to the newstreamlined operational procedures and totranslate the user interface to Turkish, includinga transfer of know-how to Turkish customs staffso that they could subsequently maintain andenhance the application source code that wasprovided.

SOFIX/BILGE. The package chosen was SOFIX,a derivative of the French customs administra-tion SOFI system. In Turkish it was called BILGE.The software was provided by a consortium ofFrench customs and Bull S.A., with an initial con-tract covering the provision of the softwaresource code, its customization, hardware, andimplementation support at a pilot site. It wassuccessfully launched in a pilot operation atIstanbul Airport—one of the busiest customsfacilities in Turkey—in the summer of 1998.BILGE was installed in a distributed configura-tion at 59 customs offices throughout Turkeybetween 2000 and 2002 following an interna-tional tender and contract award to Koç, a largeTurkish firm. In addition to installing a LAN andapplication/database servers at each site, a WideArea Network (WAN) redundantly linked alllocalities with a center at customs headquarters

in Ankara where a national data warehouse wasestablished to produce trade statistics and man-agement information. The contractor success-fully trained thousands of customs staff andtraders, as the system was simultaneously rolledout across the country.

BILGE is a client/server application based onan Oracle database that supports a full rangeof customs operations, including integratedtariff, accounting, import and export clearance,inspection selectivity, transit and other tem-porary admission regimes, and trade statistics.Traders were initially required to input manifestand declaration data in kiosks provided at eachcustoms office, but are now encouraged to sub-mit transactions electronically through EDI or asecure Web site.

Modernization Results. Today, customs oper-ations in Turkey are vastly different from 1996,mostly as a result of effective automation.Some improvements achieved include thefollowing:

• Ninety-nine percent of all transactions areprocessed by BILGE and statistics are a by-product. Previously, all transactions wereprocessed manually and subsequently inputfor statistics generation.

• Only 25.5 percent of imports and 9.6 percentof exports are subject to pre-release controls,instead of 100 percent of all consignmentsbeing inspected, as had been done previously.Additionally, pre-approved importers (356 asof May 2002) are now entitled to immediaterelease of consignments subject to post-releasecontrols.

• Seventy-five percent of imports are nowcleared within 24 hours, and 83 percentwithin 48 hours.

• Customs was the first implementation of EDIin Turkey, and now 42 percent of all customstransactions are submitted electronically (EDIor via the Web site).

• By 2001, staff numbers were reduced by 10percent, 73 offices with little or no operationalactivity were closed, and the numbers andlocations of regional offices were rationalized.A new customs law that complies with EUstandards came into effect in February 2000.

Source: David Kloeden, Note prepared forthis study.

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WCO Agreement on Customs Valuation. The focusis on both revenue protection and trade facilitation.The solution can be extended on a regional andglobal networking basis by incorporating featuresfor customs unions and trade security. The technol-ogy platforms used are Web-enabled, incorporatemobile technologies, and are geared toward open-ness and flexibility. The software applicationsthemselves are modular and are designed to inte-grate with existing customs systems.

TATIS is currently engaged, through its businesspartners, in the systems procurement process of anumber of customs administrations.

MicroClear MicroClear is offered as a state of theart, fully integrated, functionally rich system thatdelivers secure and efficient processing of all cus-toms-related documentation through a Web-basednetwork.10 It is offered by Inspection and ControlServices (ICS) and developed using .NET technol-ogy that is authenticated and supported byMicrosoft. Current or previous releases of Micro-Clear—partially or the full solution—are workingin China, Dubai, Kuwait, the United States, theRussian Federation, the United Kingdom, and India.In its promotional literature MicroClear notes thatits .NET architecture provides for flexible solutionsrequired to meet the enforcement of varying laws,highly secured Web-based solutions, easy cus-tomization, fully integrated solutions, maximumscalability, connectivity to external systems, and easyintegration with existing systems. The system caneasily translate paper-based documentation to elec-tronic protocols and standards in accordance withWCO conventions.

MicroClear provides for a back-office tool that isused to configure the system to introduce new busi-ness rules or duty calculation formulas, changeexisting logic, change the business pipeline systemprocess flow, define workflow, and build new e-forms or pages. These modifications require mini-mum coding. MicroClear considers this a mainadvantage, as it reduces future dependence on ven-dor support. The license to use and modify thesource code is provided with the system with a viewto permitting future support of the system fromdomestic sources. The system is built on a platformthat supports nonalphanumeric characters.

PC Trade New Zealand’s Statistics Department’sPC Trade software was initially designed to producenational trade statistics, relying on ASYCUDA-generated import data. Providing a basic front-endgoods declaration processing and duty assessmentmodule has further enhanced PC Trade. The systemworks on stand-alone PCs, but can be networkedusing Novell or Windows 95 Networking. It is also afull statistical analysis package. It is widely used inisland states of the Pacific such as Tonga, FrenchPolynesia, Vanuatu, and Guam.

ALICE The European Commission is currentlydeveloping, as part of its Customs and Fiscal Assis-tance Office program, a customs management sys-tem that is compatible with the integrated tariff ofthe European Community. Called ALICE it is basedon the newest technology (.Net framework), anduses Oracle as its database management platform.ALICE is scheduled to provide export, import, andtransit modules and to include all regular modulesthat make up a full customs management process-ing instrument. At present, ALICE is under con-struction and testing with scheduled rollout at theend of 2004 in Bosnia and Herzegovina. If thisdevelopment is successful it is possible that ALICEwill become the system of choice for future EUaccession partner countries.

Danish Customs Administration Solution TheDanish customs administration developed a simplegoods declaration processing system in conjunc-tion with Bull S.A. This product is now being mar-keted by Bull S.A. and is already incorporated as akey element in a comprehensive computerizationproject being developed by the Cyprus customsadministration. This project includes many inno-vative solutions and will be totally Internet enabledwhen implemented.

Information Technology “Beyond Customs”

A new trend in the use of ICT to promote trade facil-itation is to create an electronically connected tradecommunity that includes all trade partners. Such acommunity is made up of, among others, customs,banks, shippers, ports and airports, brokers, regula-tory agencies, statistics departments, and motorvehicle registration. Such a system is fully opera-tional in Singapore and Mauritius. Based on this10. See the ICS Web site at www.icsinspections.com/.

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model and using the same technology, Ghana isin the process of implementing its Tradenet. Tunisiaand Senegal are also committed to implementinga customs management system with the ambitionof constituting the core of an electronic tradenetwork.

The Singapore TradeNet links multiple partiesinvolved in external trade—including 34 govern-ment controlling units—to a single point of trans-action for most trade-related transactions, such ascustoms clearance and payment of duties and taxes,processing of export and import permits and cer-tificates of origin, and collection of trade statistics.One of the first steps was to review the prevailingand required trade documentation and to proposeto reduce these multiple trade documents into onesingle online form to serve nearly all trade docu-mentation needs in the country. CrimsonLogic11

was entrusted to own and operate the TradeNet sys-tem, with the Singapore Trade DevelopmentBureau, the port and civil aviation authorities, andthe international airport as stakeholders. IBMdeveloped an EDI system to allow computer-to-computer exchange of intercompany business doc-uments between connected members of the Singa-pore trading community. One document was to besubmitted by the trader, and had to contain all theinformation required for that import or export byany party involved in any way in that transaction.The system was rolled out gradually in 1989 and by1991, 95 percent of all air and ship transport wastransacted through Tradenet. The progress of theproject benefited greatly from the fact that many ofthe members of the trading community hadalready acquired substantial computer knowledgeand relied on sophisticated computer equipment intheir operations.

Other countries that desire to leverage e-gov-ernment and e-commerce initiatives can adopt acustoms solution that provides a single portalthrough which traders and officials involved in thetransaction can submit and access all informationassociated with processing the consignments.Such a portal can interface with a variety of exist-ing customs management tools. In Ghana, the EDIportal has been combined with the customs man-agement system of Mauritius (See box 13.4). InSenegal, Orbus 2000 has the same ambition of

electronically connecting all trade-related institu-tions (box 13.5).

Guidelines for Selecting an AppropriateICT System for Customs

The evaluation of the appropriate IT solution is notan easy task, certainly now that so many alternativesare offered on the market, and the option of buildinga national solution is always present. The selectionprocess could be done in two stages. First, the vari-ous possibilities can be scored against each other, sothat only a few solutions are retained for furtherinvestigation. At the second stage, the procurementprocess can spell out more detailed requirementsand let possible providers, and even the nationalsolution proponents, declare their preparedness tobid—technically first and financially second. Thesetwo phases can work in succession, with the firststage delivering a short list to be used in the second.This approach is now briefly described.

Prequalification: Scoring the Different PossibleSolutions The prequalification stage requires asystematic evaluation of the various solutions andtheir suitability for a particular country. This evalu-ation would take place on the basis of a review ofthe product descriptions, and seeing the systems inoperation, where possible, in situations similar tothose in the country in question. The evaluationmay want to score the various solutions (on a scalefrom 1 to 100), and combine the component scoresinto an overall score. These scores can then be com-pared across vendors and possibly against an “idealICT solution” that would follow all WCO guide-lines and adopt the most modern hardware plat-forms. The providers with the highest scores wouldthen constitute the short list to be contacted forfurther discussion and the second phase. The taskof developing such a solutions assessment could becontracted out to a computer consultancy firm.

The components to be scored for each providermay include the following:

• Provider strategy. The evaluation could includethe provider’s vision and principles, the type ofsolutions and services it provides, its trackrecord on capacity building and assistance, itsexperience and expertise, the company’s stabilityand financial base, and its installed base.11. Called Singapore Trade Services until 2002.

The Role of Information Technology in Customs Modernization 305

BOX 13.4 Ghana Gateway Project Case Study

The trade liberalization measures of the 1990shad for several years not delivered the hoped-fornew foreign direct investment or export expan-sion in Ghana, and several studies suggestedthat for this to happen structural reforms wererequired. To launch these reforms, a dynamicexport promotion strategy was developed. Itsmain operational features were that (a) Crimson-Logic, the Singapore firm that managed the Sin-gapore TradeNet system would provide the soft-ware for the electronic commerce–basedcommunity system, which would become thecore of the Ghana TradeNet community; (b)Ghana would adopt the customs managementsystem that was designed for Mauritius and thatwas successfully interfacing with the Mauritiuselectronic commerce trade community; and (c)a new company would be created to implementboth TradeNet and the Ghana Customs Man-agement System (GCMS) at customs. This com-pany was to be given a Build Operate and Trans-fer (BOT) contract. In return for its equitycontribution and adherence to the service con-tract, it would receive annual payments forservices rendered and would transfer equity inthe company to the government of Ghana after10 years.

The Ghana Community Network (GCNet)was created as a joint venture company withforeign shareholders (Societe Generale deSurveillance with 60 percent, customs with20 percent, the Ghana Shipping Council with10 percent, and two local banks, each with 5 per-cent). In November 2000, GCNet was incorpo-rated with equity of US$5 million. It operatesunder a service contract with the Ministry ofTrade and Industry. This contract lasts until 2010.It instructs GCNet to install the electroniccommerce–based system and a new customsmanagement system.

GCNet adopted a hands-on approach duringthis whole process, and provided assistance tocustoms through local staff training and installa-tion of the information technology.

Community Networks. A start has been madeto connect various members of the tradingcommunity. The following members are alreadyconnected:

• the shipping lines that provide electronicmanifests to GCNet, which are then

transferred to Ghana Ports and HarborsAuthority

• Ghana Shipping Council, which obtains allinformation regarding the movement of shipsand airplanes

• customs, which obtains customs goods decla-rations electronically

• banks, which inform customs electronically ofpayments made

• the statistical office, which is connected toreceive from customs all relevant tradestatistics—the statistical office has not yettaken advantage of this connection

• Ministry of Finance, which is connected andcan download all trade information as well asall transactions of taxpayers identified by per-sonal identification number.

Lessons Learned. Private–public sector part-nerships along the lines of the BOT format canwork. GCNet anchored the reforms and assuredcontinuity and focus on the reform objectivesduring a period of political transition.

Drawing on IT can yield quick results. It tookthree-and-a-half years to roll out GCNet andGCMS in ports that account for more than 90percent of all Ghana’s trade. Clearance timesand revenue performance far exceeded expecta-tions. The overall costs were reasonable.

Change of customs operations can bespeeded up by hands-on technical support.Whereas customs had struggled for years toupgrade its information system or to make thebest use of it, the reforms required an outsidepush and hands-on implementation supportto force the process simplification throughfor the adoption of advanced computerizationprocesses.

Top-level support helped to launch and sus-tain the project.

Customs has actively participated with therollout of the ICT technology, but will nowactively pursue its own modernization process innearly all areas but ICT and related processes.This modernization process will give the overallproject a better chance of being sustainable overtime. Also, a modern customs might be in aposition to take over from GCNet when the serv-ice contract expires.

Source: De Wulf 2004.

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BOX 13.5 Senegal Case Study

Senegal is preparing a suite of products to makemaximum use of IT to facilitate trade throughinitiatives collectively called GAINDE 2000.These products consist of an electroniccommerce–based environment to accept anddisseminate trade transaction data to all mem-bers of the trading community; an advancedcustoms management system; and an electronicpayment system.

ORBUS 2000ORBUS is intended to become a real preclear-ance system. It is designed to accept theelectronic declarations of traders (using Inter-net connections) containing all informationrequested by the various regulatory agencies;transmit this information to all pertinent agen-cies to provide electronic clearances; and trans-mit all this data to the customs managementsystem. Members of the trading community tobe connected include customs, banks, monetaryauthorities, regulatory agencies and agenciesresponsible for quality control, the federation ofinsurance companies, Directory of Foreign Tradein the Ministry of Commerce, Metrology Depart-ment, the PSI company, Treasury, and others. Itsdesign was inspired by the system operating inSingapore. Using resources of a World Bank proj-ect, the “Direction de l’Informatique de l’Etat”under the Presidency of the State financed theinstallation of the necessary communicationsand transmission equipment for all connectedgovernment agencies. The ORBUS 2000 moduleis managed by GIE GAINDE 2000, a companycreated to ensure the proper installation andimplementation of the electronic commerceenvironment and the new customs processes.

The technical architecture set up for theORBUS system is built on a data infrastructureusing the latest information technologies withthe view to guaranteeing data accessibility, relia-bility of communications, system availability,data integrity, and security. System testingstarted in early 2004. Effective and efficient roll-out of the full ORBUS 2000 with its various capa-bilities requires that all members of the tradingcommunity activate their connectivity and adjusttheir own operating procedures to issue clear-ances electronically; and the technique (front-end and operating system at ORBUS 2000) mustprove itself to be robust and easily accessible byall involved. National rollout will require a majorpublic relations and education campaign.

TRADE X/ GAINDE In the late 1980s the Technology Division of theMinistry of Finance designed and operated a cus-toms management system. One objective ofchoosing a national solution was to improve thecountry’s national IT skills. The system was intro-duced in 1990 and periodically upgraded. Trans-ferred to customs in 1998, the system was out-moded and expensive to maintain. Hence, TRADEX was designed as a replacement. The logic forcontinuing an in-house solution stemmed from alegacy attitude, and, in part, from a deliberatepursuit of the development of national ITC capac-ities as well as to gain acceptance for its adoptionby customs staff and the private sector. The pri-vate sector was intensively consulted as the mod-ules and their various aspects were beingdesigned. Local consulting firms were twinnedwith customs experts to design the new TRADE Xsystem and are expected to provide ongoingmaintenance services. The TRADE X system isbased on the most up-to-date technology andincorporates a series of new functionalities. Itinterfaces with ORBUS 2000, has an advancedrisk assessment module, a valuation database,and cargo processing facilities, and anticipateselectronic payments. It will also interface with thesimulator that permits traders to simulate clear-ance costs and find out what clearance regula-tions apply, and with a data warehouse.

TRADE X contains all the functions availablein most off-the-shelf modern customs manage-ment systems and is in full conformity with theWCO guidelines on computerization. The sys-tem was rolled out on a pilot basis for imports toselected locations in October 2003. Further roll-out is expected during 2004. Customs is nowconsidering adjusting its organizational struc-ture, originally designed around manual cus-toms processes, to fully leverage the enhanceduse of modern customs management tools.

SEPAY—Electronic Payment SystemA working group, bringing together staff fromcustoms, Treasury, and the banking sector,designed a system to permit customs brokers topay duties and taxes electronically. Rollout isexpected during the second half of 2004.

Source: Ibrahima Diane, General Manager ofGIE GAINDE 2000. Personal communication.

• Functional architecture. How complete is thesuite offered? How do the functions offeredcompare with the specific needs of the country?How easy would it be to add on more specializedmodules?

• Application architecture. What is the complexity,scalability, performance, security, and volatilityof the system architecture?

• Software infrastructure. What is the softwarebasis for the user interface, the applicationserver, data management, software integration,and security?

• Technology infrastructure. What platforms areproposed for the hardware, application server,data communications, system management, andsecurity?

• Implementation and deployment. How willimplementation details—project management,design, development and delivery, change man-agement, training and implementation, opera-tions and support—be carried out?

• Deployment resources. What are the bidder’splans for resource management, technicalsupport, capacity building, governance, andplanning?

• Deployment and delivery costs. What are the costsfor software development and delivery, techno-logical infrastructure, implementation anddeployment, support and training? What are theoptions for operational funding, and system life-cycle costs?

The Process of Selecting the Provider At thispoint a choice must be made between the variousnational solutions and off-the-shelf solutions, orsimply among the latter if only off-the-shelf solu-tions are being considered. Including a nationalsolution in the process should be a straightforwardexercise when the solution is proposed by a thirdparty, but may be more challenging when the pro-posal emanates from within customs. While diffi-cult, a partisan decision in favor of customs’ pro-posal without adequate evaluation should beavoided.

Three broad determinants can be used to evalu-ate proposals, assign a score, and select a winner:(a) compliance with the terms and conditions ofthe tender (other terminology may be used, such asbidding documents, request for proposal, request

for bids, and so forth); (b) technical complianceagainst specified criteria using a weight-based scor-ing mechanism; and (c) value for money—whichbalances the other components, subject to satisfac-tion of minimum standards against cost.

Terms and conditions of the tender. The biddingdocument must provide detailed specifications.The document should reflect a balance betweenproviding too broad and general specifications,which would qualify all possible providers, andproviding specifications that are too narrow so thatno provider can bid, or only one. Specificationsshould cover a broad range of issues includingfunctional requirements, technical requirements,project and implementation requirements, supportrequirements, security requirements, capacityand performance requirements, and contractualrequirements. The bidder’s prior track record isparticularly relevant, with consideration given tosuccessful outcomes with other clients under simi-lar circumstances. Vendor claims should be veri-fied. The quality of prior results is more importantthan the quantity. A small number of very success-ful contracts may be preferable to a large number ofmediocre outcomes. Additionally, in the rapidlyevolving technology world, new participants in themarket should not necessarily be disregardedbecause of a limited track record. However, theissue that will determine the new entrants’ poten-tial is their understanding of modern customsadministration and how technology can be bestapplied to the business rather than knowledge oftechnology with an intention to learn about cus-toms operations on the job.

Evaluation against technical requirements. Anapplication’s functionality should be the maindriver of the decision. The functions should be tai-lored to local circumstances and the extent towhich modernization and reform have progressed(or will progress). Some functions will be core toany system, and some may be desirable. Functional-ity determination is a task for customs administra-tors (that is, the users) rather than technologists.The functions need to be prioritized and weightedaccording to importance. Table 13.1 provides a listof the desired functions. A scoring model is neededto uniformly compare bids against technicalrequirements. The actual score weighting needs tobe determined carefully, but functional require-ments should predominate in the decision. By way

The Role of Information Technology in Customs Modernization 307

of example, a model could assign a 40 percentweight to functional requirements (further sub-divided for each function), 25 percent to projectand implementation requirements (including ven-dor experience), 13 percent to technical require-ments, 10 percent to vendor support, 5 percent forsecurity features, 5 percent for contractual issues,and 2 percent for local capacity building.

Financial evaluation. The financial conditions ofonly those proposals that have met a minimumtechnical standard should be considered. Anythingunder the threshold should be eliminated, ordepending on the procurement rules, given achance to be brought up to standard provided allbidders have similar opportunities. The weightingbetween cost and scoring is important, as moreemphasis on cost will favor the lowest cost solutioneven if it is not technically the best (and maybeeven the worst). In considering costs, all proposalsthat meet the technical conditions must be consid-ered equally. Therefore, all similar costs must beincluded and properly quantified (including costsborne by the purchaser), and possibly includinglifetime costs of the project.

Costs vary widely from one project to the next.Obviously, the size of the country and complexityof the desired functions will affect costs. For a par-ticular country the hardware costs for customs aswell as the front-end costs for traders are not likelyto vary too much from one solution to the next, asthey are more or less dictated by the available tech-nology platforms of the day. Also, implementationcosts that include training of staff and the tradercommunity also will not differ much from onesolution to the next. Hence, costs will tend to varyaccording to the level of design, programming, andmodification that will be involved. The degree ofreliance on local contractors will also affect costssubstantially, as will built-in markups.

National solutions tend to be expensive becausethey require that the functions of the system bedesigned and programmed in detail. These designand programming costs tend to be heavy. InMorocco, for instance, of a total project cost ofabout US$10 million, US$6.5 million went todevelopment.

One of the great attractions of the off-the-shelfsolutions is that the development costs can beshared with others. At one extreme is ASYCUDA,which provides the ASYCUDA program at no cost,

permitting the adopting countries a proverbialfree ride on the massive investment undertakenby UNCTAD in the process of readying ASYCUDAfor implementation. Despite this free aspect ofthe ASYCUDA solution, the implementationstill requires substantial resources for hardware,facilities, and communications. In Lebanon, forinstance, installing ASYCUDA++ in the late 1990shad a total price tag of about US$5 million. InBolivia, software maintenance costs are embeddedinto the operational budget of the National Bureauof Customs. Total development costs for the overallproject (the local project team plus the UNCTADteam that assisted in transferring ASYCUDA), ranto about US$3.85 million. Hardware, communica-tions, and infrastructure improvements for the 5large and 19 medium and small offices throughoutthe country added another US$3.1 million to totalcosts. The Philippines Tax Computerization proj-ect—using ASYCUDA—with the Bureau of Cus-toms project came to US$28 million.

Other off-the-shelf solutions need be adjustedto local requirements and circumstances, and thatdoes not come free either. For instance, SOFIX’sinstallation in Turkey required considerable modi-fication and rewriting (see box 13.3). This was alsothe case for the installation of SOFIX in Argentina.The TIMS solution is often bundled with a man-agement contract, as was the case in Mozambiqueand Angola, and its implementation costs are con-solidated with the other interventions of CrownAgents in these countries. In Ghana, the Crimson-Logic portal was bundled with the Customs Man-agement System of Mauritius; the overall cost ofthe project was about US$5 million in equity forGCNet plus about US$2.5 in loans taken out byGCNet, which included the acquisition of the soft-ware, the modifications for the Ghanaian context,the purchase of the equipment and infrastructure,as well as extensive training of staff and traders. InBolivia, the National Bureau of Customs has devel-oped a number of satellite systems around ASY-CUDA++ to support post-release review and datawarehousing functions, and has plans for addi-tional satellites to improve risk-assessment anddata-mining capabilities.

As noted earlier in this chapter, the costs ofimplementing ITC at customs is only part of the lifecycle cost of these systems. All too often these main-tenance and upgrading costs are underestimated

308 Customs Modernization Handbook

and not adequately included in the life cyclecosts. As a result, many systems are implementedwithout adequate financial support. The investmentrequired after a few years is then usually larger thanwhat would have been required if proper ongoingfinancial support had been available.

Operational Conclusions

Information and communications technology cansubstantially contribute to making customs opera-tions both more effective and more efficient. Thisfact has been known to many customs administra-tions for more than two decades. However, the pos-sibilities of ICT change constantly. The newesttechnologies provide for more friendly user inter-faces by allowing electronic submission of data andelectronic payments, better support for the man-agement of exemptions and suspense regimes, andhave made great progress in risk assessment andselectivity modules. There is no doubt that the useof ICT has substantially contributed to safeguard-ing the revenue mobilization function of customsand to speeding up the clearance processes. Everycustoms service must attempt to implement themost advanced ICT appropriate for its particularcircumstances. Hence, managing ICT must be a keyfunction in customs administration.

Implementing ICT is not an objective in itself. Itshould be tailored to assist customs in attaining itsobjectives. Therefore, any ICT strategy should bepragmatic and realistic. It should be attuned to thereal needs of the country and the customs adminis-tration and to the capacities of customs staff tomake the best use of the new possibilities offered.Clearly, there is no “one size fits all” solution.

Designing the appropriate ICT solution is onlypart of the ICT strategy and can be dealt with byexperts, consultants, and technicians. More impor-tant and more difficult than designing the system isto effectively implement the system. To do so, cus-toms needs to adjust work processes, train staff andtraders, and at times adjust the organizationalstructure. All too often customs underutilizes theICT system—paid for so dearly—by failing to makethe accompanying changes.

Policymakers should review the pros and cons ofdesigning a national ICT solution. The authors sug-gest that most countries would do well to carefullyinvestigate the various off-the-shelf solutions now

available because unique systems tend to be expen-sive and often not as well designed as those on themarket. Many of the off-the-shelf solutions incor-porate the most advanced technologies and give theassurance that the functions of the different mod-ules have been fully tested and the programs arestable and robust.

Selecting a computerized customs managementsystem is a complex affair and proper safeguardsshould be adopted to obtain value for money. Thechapter suggests how to tackle this process by sys-tematically reviewing the technical and financialimplications of the various options.

Customs needs to pay adequate attention to fullfunding of its ICT systems. ICT is expensive toinstall and to maintain, certainly in light of therapid progress of technological change. Softwareprograms and hardware platforms need to beupgraded to adjust to these technological advances.Hence, funding needs to be assured not only for theinstallation but also for the maintenance andupgrading of the software and the hardware. All toooften the ICT budget is starved once foreignfinancing is depleted. This does little harm to theICT in the short-run, and may lead to complacency.Yet, before long this will lead to costly ICT break-downs and the need to overhaul the system at coststhat are much higher than if regular upgrading andmaintenance had been undertaken.

Further Reading

Corfmat, François, and Patricio Castro. 2003. “Computerizationof Customs Procedures.” In Michael Keen, ed. Changing Cus-toms: Challenges and Strategies for the Reform of CustomsAdministration. Washington, D.C.: International MonetaryFund.

Lane, Michael. 1998. Customs Modernization and the Interna-tional Trade Superhighway. Westport, Conn.: QuorumBooks.

World Customs Organization. Guidelines to the Revised KyotoConvention. Chapter 7. Brussels. www.wcoomd.org.

References

Appels, T., and H. Struye de Swielande. 1998. “Rolling Back theFrontiers: The Customs Clearance Revolution.” The Interna-tional Journal of Logistics Management 9(1): 111–18.

Corfmat, Francois, and Patricio Castro. 2003. “Computerizationof Customs Procedures.” In Michael Keen, ed. Changing Cus-toms: Challenges and Strategies for the Reform of CustomsAdministration. Washington, D.C.: International MonetaryFund.

The Role of Information Technology in Customs Modernization 309

310 Customs Modernization Handbook

Steenland, Marcel, and Luc De Wulf. “Morocco.” In Luc DeWulf and José B. Sokol, eds. Customs Modernization Initia-tives: Case Studies. Washington D.C.: World Bank.

World Bank. 2004. “Procurement Guidelines.” Washington, D.C.http://siteresources.worldbank.org/INTPROCUREMENT/Resources/Procurement-May-2004.pdf.

De Wulf, Luc. 2004. “Ghana.” In Luc De Wulf and José B. Sokol,eds. Customs Modernization Initiatives: Case Studies.Washington, D.C.: World Bank.

Dutta, Soumitra, Bruno Lanvin, and Fiona Paua, eds. 2004.Global Information Technology Report 2003–2004. New York:Oxford University Press. www.weforum.org/site/homepub-lic.nsf/Content/Global+Competitiveness+Programme%5CGlobal+Information+Technology+Report.

311

Index

absorption (or roll-up) principle, 196ACV. See Agreement on Customs Valuationadministrative interpretation of customs laws, 61, 76Advance Cargo Information Guidelines (WCO), 267Africa

See also specific countries and regional organizationsautonomous revenue authority, 40, 41customs revenue for, 5, 23t1.A.1import tariffs, role of, 5regional trade agreements, 206–207, 207f 9.1

African Development Bank (AfDB), 4African Growth and Opportunity Act (AGOA),

201–202, 206Agreement on Customs Valuation (ACV), 8

case studies of reform and, 116developing countries

extensions for implementation, 158, 158n6,159–160

implementation difficulties for, 161–163special provisions for, 159–160

failure to follow, 140fairness and uniformity of, 140n10implementation issues, 56, 156, 160, 161–163,

174–175, 177–178administrative limitations, 162–163Doha Ministerial Conference, 163high tariff rates, 161–162lack of ownership, 161, 163–164less compliant trading environment, 162revenue loss, 161

improvements in practices, 163–168creation of value database, 165–166exchanging information among exporting

countries’ customs administrations,166–167

minimum values and reference prices, 167ownership of issues by developing countries,

163–164strengthening organization and infrastructure, 164technical assistance, 167–168

legislation and regulations to adopt, 75, 76b4.2, 160,175–176

mandated use for WTO members, 156, 158, 158n4,175–176

OECD adoption, effect of, 161n8operational conclusions, 174–175

organizational structure and training, 160, 177overview of provisions, 158–159Preferential Trade Agreement (PTA) proposal

for changes to, 161n7PSI price verification, 170risk management and, 98b5.1shifting burden of proof appended to, 158, 174, 175special and differential treatment (SDT), 158valuation procedures and control, 160, 176–177

Agreement on Rules of Origin, 8, 186, 188–189Agreement on Textiles and Clothing, 187, 208Agreement on Trade-Related Aspects of Intellectual

Property Rights (TRIPS Agreement),64, 75, 76b4.2

agricultural productsexport subsidies, 4nonpreferential rules of origin issues, 189–190time-release studies on, 27

air cargo, 271–273European Civil Aviation Conference (ECAC), 272International Air Transport Association (IATA), 266,

271–272International Civil Aviation Organization (ICAO),

266, 271time-release studies on, 27United Kingdom, 272–273U.S. Transportation Security Administration (TSA)

initiatives, 272Air Transport Association (ATA) Carnet Convention,

75, 76b4.2Albania

See also Trade and Transport Facilitation in SoutheastEurope program (TTFSE)

case study of reformhuman resources, 114

cost per declaration, 16recruitment of customs staff, 83

ALICE system, 303amnesty as part of anticorruption strategy, 74Andean Community, 194, 201Angola

compensation of customs staff, 36management contracts, 45, 45n23, 46, 47

ANZCERTA. See Australia New Zealand CloserEconomic Relations Trade Agreement

APEC (Asia-Pacific Economic Cooperation), 107

Boxes, figures, notes, and tables are indicated by b, f, n, and t respectively.

appeals, 76under Revised Kyoto Convention, 56–57

ARAs. See autonomous revenue authoritiesArgentina Public Sector Management Technical

Assistance Project, 146b7.6Armenia, 136b7.2Arusha Declaration on Integrity in Customs, 68, 72–87,

114, 114n10ASAC (Aviation Security Advisory Committee), 272ASEAN. See Association of Southeast Asian NationsAsia

See also specific countries and regional organizationsautonomous revenue authorities, 41customs revenue for, 5, 23t1.A.1import tariffs, role of, 5TIR, use of, 255

Asian Development Bank, 4Asian Free Trade Association (AFTA), 107, 193, 198, 204Asia-Pacific Economic Cooperation (APEC), 107Association of Southeast Asian Nations (ASEAN), 194,

198, 201ASYCUDA. See United Nations Conference on Trade

and Development (UNCTAD)ATA. See Air Transport Association (ATA)

Carnet Conventionaudit-based controls, 6, 28, 287, 290

integrity issues and, 79–80, 80b4.6Australia

audit and investigation, 80Department of Trade and Customs, 37–38full cumulation, 195

Australia New Zealand Closer Economic Relations TradeAgreement (ANZCERTA), 193, 195

automation. See information and communicationstechnology (ICT)

autonomous revenue authorities (ARAs), 40–43, 47See also specific countrieschecklist, 48–49compensation, 43–44, 43n20, 82financial autonomy, 41–42human resources, 42–43integrity issues, 44, 124b6.5management structure and responsibilities, 40–41

Aviation Security Advisory Committee (ASAC), 272

Bangladeshclothing imported from and regional cumulation

rules, 195Export Diversification Project, 142b7.5ICT and customs modernization, 288special bonded warehouse facility, 224, 224b10.5

Barbone, Luca, 151BDV. See Brussels Definition of Valuebilateral cumulation, 194, 206bilateral security initiatives, 275bilateral transit agreements, 259–260BILGE system, 302b13.3

Boliviaadoption of new Customs Code, 75, 79corruption and integrity issues, 74, 108, 114, 123customs management, 112customs officials, 33n2, 34b2.1

bribery of as cost of doing business, 70design, 110economic and population characteristics, 105, 106t6.1enforcement efforts, 120fiscal performance, 106, 106t6.2, 107, 119, 120t6.3human resources, 113, 123information technology, 114, 308objectives of reform, 108overall reform context, 107physical inspections, 117, 118political support and sponsorship, 110processing time, 26, 27, 121–122, 121t6.4technical assistance, 111trader satisfaction with processing, 122valuation issues, 116

BOO (Build, Operate, and Own) contracts, 44BOT (Build, Operate, and Transfer) contracts, 44,

305b13.4Botswana

Department of Customs and Excise, 167Walvis Bay Development Corridor (now Trans

Kalahari), 261bribes. See integrity issuesBrussels Definition of Value (BDV), 156, 157, 170Build, Operate, and Own (BOO) contracts, 44Build, Operate, and Transfer (BOT) contracts,

44, 305b13.4Bulgaria, 16

See also Trade and Transport Facilitation in SoutheastEurope program (TTFSE)

Burundi, 261

CACM (Central American Common Market), 194Cambodia

compensation of customs staff, 82utilization rate for LDCs and, 201, 209World Bank assistance, 129

Cameroon’s adoption of new Customs Code, 75, 79Canada

See also NAFTA (North American Fair TradeAgreement)

full cumulation, 195merger of customs with revenue agency, 38–39, 38n13Public Safety and Emergency Preparedness Ministry,

37, 39Canada–Chile agreement, 199cargo security. See security role of customs

administrationsCaribbean Common Market (CARICOM), 157, 201case studies of reform, 103–126

See also specific countriescomponents of reforms, 111–119

312 Index

Customs Code adoption, 111–112customs management, 112–113design, 110–111donor assistance, 111, 125economic and population characteristics, 105, 106t6.1enforcement efforts, 119–121fiscal performance, 105–107, 106t6.2

outcomes of reform programs, 119, 120t6.3human resources, 113–114, 125information technology, 114–115, 125integrity issues, 114

outcomes of reform programs, 123–124interagency coordination, 125lessons learned, 124–126objectives, 108–110outcomes of reform programs, 119–124overall reform context, 107performance indicators, use of, 125–126physical inspections, 117–118preshipment inspection (PSI) services, 116processing time, 121–123, 121t6.4reform experiences, 108–111regional and preferential arrangements,

107–108revenue and trade facilitation, 118–119sponsorship and political backing, 110, 124–125trader cooperation, 125trader satisfaction with processing, 121–123valuation issues, 116–117

CCP (central control point), establishment of, 275Central American Common Market (CACM), 194central control point (CCP), establishment of, 275central customs office (CCO) role in transit procedures,

250–251Chad Economic Recovery Credit Project, 128n2change management, importance of, 140, 145, 149charitable, religious, cultural, educational, and similar

social purposes imports, 235checklists

duty relief and exemption regimes, 240human resources, 47–48strategy for customs modernization, 29valuation issues, 180

ChileCanada–Chile agreement, 199U.S.–Chile agreement, 199

clearance proceduresSee also inspections; time-release methodologycase studies, 108–111transit, 251

clothing. See textiles and clothingCoast Guard, U.S., 96-Hour Notification of Arrival,

270–271code of conduct, development of, 80–81, 81b4.7

case studies of reform, 114Model Code of Ethics and Conduct (WCO),

74, 80, 114

Colombia, merger of customs with revenue agency,38, 39, 40

Common Market for Eastern and Southern Africa(COMESA), 108, 198, 198n14, 203, 206

Customs Declaration Document, use by NorthernCorridor countries, 262

communicationsSee also information and communications

technology (ICT)exchanging information among exporting countries’

customs administrations, 166–167international and bilateral security initiatives,

importance of, 275compensation of customs staff, 17, 35–36

autonomous revenue authorities (ARAs) and, 43–44,43n20

case studies of reform, 113integrity issues and, 36, 36n8, 44, 81–83, 82b4.8sequencing of reforms and, 13

compliance management, 93–94, 95t5.1comprehensive approach to modernization, 12, 22, 148computerization. See information and communications

technology (ICT)Congo, Democratic Republic of, 261container scanning equipment, 278–281Container Security Initiative (CSI), 268, 270contraband, control of, 107n4convoys, 253cooperation among agencies. See interagency

coordinationcooperation with traders, 7, 125, 264, 275corruption. See integrity issues; smugglingcosts

of administering rules of origin, 204–208Albania vs. Bulgaria, 16of information technology, 19, 296b13.1, 308–309pre-project diagnostic framework and, 134reduction of trading costs, 11of scanning equipment, 280of security initiatives, 11Serbia vs. Croatia, 16transactions, effect of, 4, 8of transit operations, 244–246, 245n5 & 6, 245t11.1

Cotonou Agreement (EU), 192b9.1, 195, 196, 199, 206cotton export subsidy, 4CrimsonLogic, 304, 308Croatia

See also Trade and Transport Facilitation in SoutheastEurope program (TTFSE)

cost of collection, 16Cross-Border Initiative (CBI), 108Crown Agents, 45–46, 45n23, 109b6.1, 111

Trade Information Management System,115, 300–301

CSI. See Container Security InitiativeC-TPAT (Customs-Trade Partnership Against

Terrorism), 268–270

Index 313

cumulation and rules of origin issues, 194–196, 194n13,199, 202, 212

bilateral cumulation, 194, 206diagonal cumulation, 194–195, 199full cumulation, 195–196, 199, 206

Customs Code. See legal framework, modernization ofCustoms Modernization and the International Trade

Superhighway (Lane), 10, 138Customs-Trade Partnership Against Terrorism

(C-TPAT), 268–270Customs Union of Central African States (UDEAC), 157

Danish Customs Administration Solution, 303de minimis rule for nonoriginating material, 196, 199,

202, 206Democratic Republic of Congo, 261Denmark

Danish Customs Administration Solution, 303merger of customs with revenue agency, 38, 39b2.2, 40

Department for International Development (DFID), 40,109b6.1, 111

design of reform projects. See strategy formodernization; World Bank

diagnostic work. See strategy for modernization;World Bank

diagonal cumulation, 194–195, 199disciplinary actions of customs staff, 36documentation flow, 248, 250–251, 253, 260Doha Development Round, 208–209Doha Ministerial Conference, 163, 164, 166drafting customs legislation, 59–60duty drawback, 196, 217–218, 225–227, 225n8

defined, 225n7determination of rates, 226guiding principles for design, 226issues, 225–226operational guidelines, 227

duty relief and exemption regimes, 215–241, 216b10.1See also duty drawbackadministration, 218–219, 239checklist for, 240customs warehousing, 230–231

economic rationale, 230–231effective and efficient administration, 231issues, 230

economic rationale, 216–217exemptions, 233–238, 239

checking end use, 236–237computer application for management of

investment project exemptions, 237b10.8controls at time of importation, 236diplomatic, 234economic or administrative issues, 234–236economic rationale, 234effective administrative systems and procedures,

236–238foreign financed projects, 235

government imports, 234imports for charitable, religious, cultural,

educational, and similar social purposes, 235investment incentives, 234–235issues, 234monitoring and control unit, 237noncommercial imports, 235–236rationalizing of, 236reimbursement instead of, 237relief goods, 235rules, 236treasury voucher system, 237–238

export processing zones (EPZs), 227–229,227nn11 & 12

for inward processing, 216–230operational conclusions and guidelines, 238–240prior exemption vs. drawback, 217–218, 239temporary admission, 231–233

economic rationale, 232effective and efficient administration, 232–233issues, 232

temporary admission for inward processing (TAP),219–224

duty suspension scheme, 222, 222b10.3equivalence and prior equivalence, 220–221illustration of successful reform, 221–222, 221b10.2issues, 219manufacturing under bond (MUB), 222–224,

223n6, 224b10.5operational and administrative requirements and

procedures, 219–220passbook, 222, 223b10.4

transit, 233, 233n19

EBA (Everything but Arms) initiative, 195Economic Community of West African States

(ECOWAS)Inter State Road Transit System (Transit Routier

Inter-Êtats, TRIE), 259, 260EDI (Electronic Data Interchange) systems, 253EEC. See European Economic Communityeffectiveness indicators for modernization

strategy, 14–15efficiency indicators for modernization strategy,

15–16, 25EFTA. See European Free Trade AssociationEgypt

interagency coordination and costs, 19–20special services for large traders, 37tax farming, 44

Electronic Data Interchange (EDI) systems, 253enforcement of laws, 32, 33, 63–64

case studies of reform, 119–121Revised Kyoto Convention and, 63–64transit problems, 253

EPZs. See export processing zonesEthiopia, 41

314 Index

EU–Mexico Free Trade Agreement, 199European Civil Aviation Conference (ECAC), 272European Commission (EC)

blueprints to access customs administrations in accession countries, 11

EC–U.S. Agreement, 270n7European Economic Community (EEC)

adoption of ACV standard, 161n8adoption of BDV standard, 157

European Free Trade Association (EFTA), 108, 188,194, 195

European Union (EU)See also Cotonou Agreementbilateral security agreements with U.S., 270n7Customs Code of, 52, 61nn38 & 39, 111n7customs services improvement efforts of, 4

Customs Assistance Mission (CAM-A), 114General System of Preferences (GSP), 187, 192b9.1,

194, 196, 200–201, 204–205methods for determining sufficient processing,

191–194New Computerized Transit System (NCTS), 253rules of origin, 186–187, 197–198, 204–205

bilateral cumulation and, 194, 206diagonal cumulation and, 194–195, 199full cumulation and, 195–196, 199

sea cargo security, 271TIR, use of, 255TRACECA, 262

EU–South Africa agreement, 199, 203Everything but Arms (EBA) initiative, 195evolution of customs role, 5–6

in 21st century, 6–7exit strategy for World Bank project, 149explosives detection devices, 278export processing zones (EPZs), 227–229

customs administration of, 228–229, 229b10.6historical background, 227n12issues, 227–228names for, 227n11other administrative issues and guidelines, 229promoting manufactured exports, 228n15single factory zones, 228n16

Fiji’s duty suspension scheme, 222, 222b10.3fish and EU importing under rules of origin, 192b9.1flexible interpretation of customs laws, 61fraud. See integrity issuesFree Trade Area of the Americas, 80n6full cumulation, 195–196, 199, 206

GAINDE system, 306b13.5gamma ray inspection systems, 280GATT (General Agreement on Tariffs and Trade)

See also Agreement on Customs Valuation (ACV)Revised Kyoto Convention and, 52n1, 56, 56n25,

57nn31 & 35

rules of origin, determination of, 187transit provisions, 246, 247valuation standards and, 156, 157

Geneva Convention on harmonization of frontiercontrol of goods, 246, 247

Georgiarecruitment of customs staff, 83World Bank assistance, 129

Ghanaautonomous revenue authority, 44Community Network (GCNet), 122, 305b13.4, 308compensation of customs staff, 35, 43, 44customs management, 112–113economic and population characteristics, 106t6.1fiscal performance, 106t6.2, 119, 120t6.3human resources, 113ICT and customs modernization, 115, 288, 304,

305b13.4, 308information technology, 115objectives of reform, 109–110overall reform context, 107physical inspections, 118political support and sponsorship, 110private inspection companies, 35n4processing time, 27, 108, 121t6.4, 122technical assistance, 111Trade and Investment Gateway Project, 111, 138n9,

140, 305b13.4TradeNet, 18, 20, 112–113, 305b13.4trader satisfaction with processing, 123valuation issues, 117

Global Information Technology Report 2003–2004(World Economic Forum), 289

globalization, 7–8rules of origin and, 203

government imports, 234guarantees for transit, 248, 250, 252, 254b11.3, 255, 261,

263, 264

Haiti, 129harmonized nonpreferential rules of origin (HRO),

189–191, 212Homeland Security, Department of (U.S.), 37Hong Kong Independent Commission Against

Corruption, 74Hors, Irene, 70, 71n3, 78, 82b4.8human resources and organizational issues,

16–17, 31–50autonomous revenue authorities, 40–43, 47

checklist, 48–49compensation, 43–44, 43n20, 82financial autonomy, 41–42integrity issues, 44management structure and responsibilities,

40–41case studies of reform, 113–114, 125checklist, 47–48

Index 315

human resources and organizational issues (continued)compensation, 17, 35–36, 43–44, 43n20

integrity issues and, 36, 36n8, 44, 81–83, 82b4.8sequencing of reforms and, 13

competency of staff, 32, 36, 47disciplinary actions, 36firing staff to hire new personnel, 83integrity issues, 32, 36, 81–84, 84b4.9

relationship with private sector, 85–86, 86b4.11internal organization, 9, 37management contracts, 44–46, 47

checklist, 48merging customs with other revenue agencies, 38–40Ministry of Finance role, 37–38morale and organizational culture, 84–85, 85b4.10operational conclusions, 46–47performance evaluation, 84post-employment jobs of staff, limitations on, 35pre-project diagnostic framework and, 133, 134recruitment, 33–34

integrity issues and, 33n2, 83, 134rotation of staff, 33n3, 83staff profile and desired skills, 32–33training, 8–9, 34–35

integrity issues and, 83sequencing of reforms and, 13

IATA. See International Air Transport AssociationICAO. See International Civil Aviation OrganizationICT. See information and communications technologyIDB. See Inter-American Development BankILO (International Labor Organization), 267IMF. See International Monetary Fundimplementation of customs reforms

ACV implementation. See Agreement on CustomsValuation (ACV)

flexibility in, 21information technology, 295, 309integrity issues, 14, 86–87

lessons learned from reforms, 88, 88b4.12strategy for modernization, 20–21transit issues, 252–253World Bank technical assistance projects

correlation estimation, 150–151implementation and outcomes, 142–144, 143t7.7,

144t7.8, 145implementation complementation reports (ICRs),

143, 143n15implementation plans, 141–142

Indian Central Board of Customs and Excise, 86Indo-Nepal Treaty of Trade, 260information and communications technology (ICT),

285–310ALICE, 303ASYCUDA, 111, 115, 253, 299–300, 308awareness of need for change, 293benefits of, 289

BILGE, 302b13.3case studies of reform, 114–115, 125computerization strategy for customs, 292–295costs of, 19, 296b13.1, 308–309creating interconnected trade community,

303–304customs staff ’s need for expertise in, 32, 33Danish Customs Administration Solution, 303guidelines for selecting system, 304–309

evaluation against technical requirements,307–308

financial evaluation, 308–309prequalification, 304–307process of selection, 307–309terms and conditions of tender, 307

implementation of new system, 295, 309in-house system, development of, 295, 297, 298b13.2,

299, 309integration issues, 287–289integrity issues and computerization, 76–77, 78b4.4key computer applications, 289–292, 291t13.1manifests and electronic transmission, 7MicroClear, 303Ministry of Finance and, 17–18modernization and, 9, 286–289off-the-shelf solution, adoption of, 299–303, 309operational conclusions, 309options, 295–309PC Trade, 303planning, 293–294post-implementation evaluation, 295procurement and installation, 294–295project planning, 294Revised Kyoto Convention and, 56, 58risk management, 290, 291f13.1

risk assessment based on electronic information,6, 28

sequencing of reforms and, 13Solutions Françaises Informatiques (SOFI

and SOFIX), 301, 302b13.3, 308steering committee for reform, 293strategic planning, 293–294system development process, 294–295TATIS, 301–303Trade Information Management System, 115, 300–301transit computerization, 253, 263World Bank technical assistance and, 131,

131n4, 134in-house system, development of, 295, 297, 298b13.2,

299, 309inspections

See also preshipment inspection (PSI) servicesdelay due to, 15, 108physical inspections

case studies of reform, 117–118less emphasis on, 287as part of risk management, 27–29, 118n15

316 Index

pre-project diagnostic framework and,131, 133

selective inspection, 27–29acceptance by MOF, 18evaluation of, 28

sequencing of reforms and, 13integrity issues, 6, 67–89

amnesty as part of anticorruption strategy, 74analytical framework for understanding corruption,

71–72audit and investigation, 79–80, 80b4.6case studies of reform, 108, 114, 123–124code of conduct, development of, 80–81, 81b4.7

case studies of reform, 114computerization, effect of, 76–77, 78b4.4consequences of corruption, 9–10, 68–70corruption; defined by World Bank and WCO, 71criminal corruption, defined, 70, 71forgery of invoices, 116n12fraudulent corruption, defined, 70, 71grand corruption, defined, 70human resources management, 32, 36, 81–84, 84b4.9

autonomous revenue authorities and, 44compensation, 36, 36n8, 44, 70, 81–83, 82b4.8mobility and random job assignments, 33n3, 83morale and organizational culture, 84–85,

85b4.10performance evaluation, 84recruitment and staff selection, 33n2, 83relationship with private sector, 85–86,

86b4.11, 87training, 83

implementation of strategy, 14, 86–87lessons learned from reforms, 88, 88b4.12

international customs response to corruption,72–87

leadership and commitment, 74, 75b4.1management contracts and, 46misappropriation, 71nepotism, 70–71operational conclusions, 87–88petty corruption, defined, 70, 70n2, 71pre-project diagnostic framework and, 133private sector’s advantages from corruption, 18PSI services and, 116nn13 & 14reform and modernization, 9, 78–79, 79b4.5, 87regulatory framework, 75, 76b4.2routine corruption, defined, 70strategies to reduce corruption, 72, 73t4.2transit, 253, 263transparency, 75–76, 77b4.3types of corruption, 70–72vulnerability of customs functions to corruption, 68,

69t4.1, 70World Bank project design, 141

Intellectual Property Rights Model Legislation (WCO), 64

interagency coordination, 7, 19–20, 275case studies of reform, 125enforcement of customs laws, 62

Inter-American Development Bank (IDB)customs services improvement efforts of,

4, 80n6technology assistance, 111

internal organization of customs services, 9, 37International Air Transport Association (IATA), 266,

271–272International Chamber of Commerce

International Customs Guidelines, 10recommendations on harmonizing nationality of

manufactured goods, 187recommendations on reducing corruption, 78Rules of Conduct, 86

International Civil Aviation Organization (ICAO),266, 271

International Convention for the Safety of Life at Sea (SOLAS), 267, 269b12.1

International Convention on the HarmonizedCommodity Description and Coding System(Harmonized System), 8, 75, 76b4.2

International Convention on the Simplification andHarmonization of Customs Procedures. SeeRevised Kyoto Convention

International Customs Guidelines of InternationalChamber of Commerce, 10

International Federation of Inspection Agencies (IFIA),168, 178t8.D.1

International Labor Organization (ILO), 267International Maritime Organization, 266, 267–268International Monetary Fund (IMF)

autonomous revenue authorities, support for, 40on computerization’s role in modernization, 287customs services improvement efforts of, 4, 19

reforms of specific countries due to, 109technical assistance, 111

International Ship and Port Facility Security (ISPS)Code, 267–268, 269b12.1

Inter State Road Transit System (Transit Routier Inter-Êtats, TRIE), 259, 260

intrusion-detection technology, 278ISPS. See International Ship and Port Facility Security

(ISPS) CodeIstanbul Convention, 75IT. See information and communications technology (ICT)

Japanfull cumulation, 195time-release analysis in, 25

Japan–Singapore agreement, 197, 204, 206Jordan

customs administration of Aqaba export processingzone, 229b10.6

World Bank assistance, 129judicial interpretation of customs laws, 61, 76

Index 317

Kenyaautonomous revenue authority, 41n18Northern Corridor, 261trade with Uganda, 108

Klitgaard, Robert, 68, 71–72, 71n3, 73t4.2“known shipper” programs, 272–273Kyoto Convention, 53

See also Revised Kyoto Convention

La Ferme Générale, 44land borders, security of, 273landlocked countries, 243–264

transit corridors and, 261–262Lane’s Customs Modernization and the International

Trade Superhighway, 10, 138Latin America

autonomous revenue authorities, 40–41import duties as revenue for, 5merger of customs with revenue agency, 38n13

Latin America Integration Association, 198Latvia

merger of customs with revenue agency, 38, 40recruitment of customs staff, 83

leadershipcustoms modernization and, 20–21, 21b1.2, 22integrity issues for, 74, 75b4.1

least developed countries (LDCs) and preferences, 201Lebanon

costs of information technology (ASYCUDAinstallation), 308

Revenue Enhancement and Fiscal ManagementTechnical Assistance Project, 141–142

legal framework, modernization of, 51–66See also Revised Kyoto ConventionACV adoption into laws and regulations, 160adoption of new Customs Code, 105

See also specific countriescase studies of reform, 111–112

enforcement of laws, 32, 33, 63–64case studies of reform, 119–121

HRO adoption into laws and regulations, 190obsolete laws, effect of, 52, 52b3.1obstacles to, 58–63

administrative and judicial interpretation, 61choice of legal instruments, 61–62determining which principles to implement and

how to implement them, 62drafting styles, 59–60interaction with other government entities, 62legal tradition, 59organization and consolidation of laws,

60–61translation, 63

operational conclusions, 64–66preparation of, 57–58, 64–66security issues, 274

MacedoniaSee also Trade and Transport Facilitation in Southeast

Europe program (TTFSE)customs management, 112revenue and trade facilitation, 118

Madagascar PSI contract with Société Générale deSurveillance (SGS), 173, 173b8.2

Mali reimbursement of taxes and customs duties onimported petroleum products, 238b10.9

management contracts, 44–46, 47checklist, 48integrity issues, 46

manufacturing under bond (MUB), 222–224, 223n6,224b10.5

Maputo Declaration on customs integrity, 114Mauritania preshipment inspection (PSI), 17Mauritius

combined information system with Ghana, 304,305b13.4

as successful EPZ, 228n14TradeNet initiative and, 20

Mercado Comun del Sur (MERCOSUR), 198, 204merging customs with other revenue agencies, 38–40Mexico

See also NAFTA (North American Fair TradeAgreement)

EU–Mexico Free Trade Agreement, 199PSI services, 116n13, 173tomato products, 185n2

MicroClear, 303Middle East, 5, 255Ministry of Finance (MOF) role

customs administrations policy, 8, 17–18, 22human resources and organizational issues, 37–38raising revenue, 5reform supported by, 110

Moroccoadoption of new Customs Code, 61, 75, 79, 111, 111n6adoption of Revised Kyoto Convention, 58, 60b3.3corruption, decrease in, 74customs management, 112design, 110duty relief regimes, 221, 221b10.2economic and population characteristics, 105, 106t6.1enforcement efforts, 120–121fiscal performance, 106t6.2, 119, 120t6.3human resources, 17b1.1, 113

customs staff rotation, 33n3information technology, 114, 297, 298intelligence and investigative function, 119objectives of reform, 108, 109overall reform context, 107phasing of reforms in, 14physical inspections, 15, 118political support and sponsorship, 110processing time, 14, 27, 121t6.4, 122

318 Index

revenue and trade facilitation, 118risk profiles, adjustment of, 28survey of stakeholders, 21tax farming, 44n22technical assistance, 111trader satisfaction with processing, 122, 123b6.4transparency in customs administration, 76valuation issues, 117World Bank assistance, 129

Mozambiqueadoption of new Customs Code, 75, 79compensation of customs staff, 36, 113corruption and integrity issues, 108, 114, 123, 124customs management, 106t6.1, 112design, 110economic and population characteristics, 105, 106t6.1enforcement efforts, 120First Road and Coastal Shipping Project, 147b7.7fiscal performance, 106, 106t6.2, 107, 119, 120t6.3human resources, 113, 123, 124implementation of reform, 109b6.1, 110information technology, 114, 115management contracts, 45–46, 47, 109b6.1objectives of reform, 108overall reform context, 107physical inspections, 118processing time, 121t6.4, 122PSI company services, 116, 118regional and preferential arrangements, 108revenue and trade facilitation, 119technical assistance, 111valuation issues, 116, 117

MUB. See manufacturing under bond

NAFTA (North American Fair Trade Agreement)rules of origin, 197–198, 197b9.2, 202, 204

methods for determining sufficient processing,191–194, 196

Namibia, 261National Trade and Transport Facilitation

Committees, 264Nepal

autonomous revenue authority, 42n19delays in duty drawback, 225n9Indo-Nepal Treaty of Trade, 260passbook system, 222, 223b10.4salaries of customs staff, 35n5

Netherlands, merger of customs with revenue agency, 38New Zealand

Australia New Zealand Closer Economic RelationsTrade Agreement (ANZCERTA), 193, 195

full cumulation, 195rejection of BDV standard, 157

Nigeria, 12996-Hour Notification of Arrival (U.S. Coast Guard

initiative), 270–271

nonclearance of transit procedure, 251–252noncommercial imports, 235–236nonpreferential rules of origin, 187–191

See also rules of originNorth American Fair Trade Agreement. See NAFTANorthern Corridor, 261

objectives of customs operations, 5–7World Bank projects, 134–135, 135n6, 135t7.4, 145

OECD. See Organisation for Economic Co-operationand Development

off-the-shelf system, adoption of, 299–303, 309one-stop border posts, 260–261ORBUS 2000 system, 306b13.5Organisation for Economic Co-operation and

Development (OECD)ACV adoption, effect of, 161n8study on cost of ISPS Code compliance, 268

Pakistanlack of transparency and reform failure, 75preshipment inspection (PSI) company, 169n20textile and garment exporters, 18Web site links for price-related data, 165n13

Panama Canal Authority, 269b12.1passbook system, 222, 223b10.4PC Trade, 303performance indicators for modernization strategy,

14–16, 22case studies of reform, 125–126corruption decrease and, 74World Bank projects, 135–138, 136b7.2, 136t7.5,

137b7.3, 150, 151Peru

adoption of new Customs Code, 75, 79, 112autonomous revenue authority, 41, 42, 43, 44, 110corruption and integrity issues, 74, 79, 114, 123, 124customs management, 112design, 110economic and population characteristics, 106t6.1enforcement efforts, 119fiscal performance, 106, 106t6.2, 107, 119, 120t6.3human resources, 113, 123, 124information technology, 114intelligence and information gathering and

analysis, 118objectives of reform, 108overall reform context, 107physical inspections, 117, 118political support and sponsorship, 110preshipment inspection (PSI), acceptance of, 17,

117b6.3, 168, 169b8.1processing time, 121t6.4, 122revenue and trade facilitation, 118, 119technical assistance, 111trader satisfaction with processing, 122

Index 319

Peru (continued)transparency in customs administration, 76valuation issues, 116, 117b6.3

Philippinesadoption of new Customs Code, 79, 112corruption and integrity issues, 70, 108, 114, 124customs management, 112design, 110economic and population characteristics, 105, 106t6.1fiscal performance, 106, 106t6.2, 107, 119, 120t6.3human resources, 113, 124information technology, 114

integrity improvements of, 77maintenance costs, 19World Bank assistance, 131n4

objectives of reform, 108overall reform context, 107physical inspections, 118political support and sponsorship, 110private sector stakeholders’ support for reform, 18processing time, 25, 26, 26b1.C.2, 121t6.4, 122PSI company services, 116regional and preferential arrangements, 107revenue and trade facilitation, 119Tax Computerization Project, 131n4, 134

costs of information technology, 308diagnostic framework, 133b7.1modification of project objectives or components,

147b7.7performance indicators, 136b7.2preparation and design, 146b7.6

technical assistance, 111trader satisfaction with processing, 122–123, 123b6.4valuation issues, 116

physical inspections. See inspectionsPLS RAMBOLL study (2001) on integrating customs

with revenue agencies, 38political support and customs modernization, 8–9, 22

autonomous revenue authorities and, 43case studies of reform, 110, 124–125World Bank projects and, 149

Port Risk Assessment (PRA), 281–283control, audit, and drill, 282–283information and intelligence, 282methodology for, 282personnel, 282procedures, 282technical means, 282

post-release verification, 6, 290See also audit-based controls

PRA. See Port Risk Assessmentpreferential rules of origin, 186–187, 191–196

See also rules of originpreshipment inspection (PSI) services, 168–174

acceptance of, 17, 18, 68, 164advantages and disadvantages of, 116n13, 169n21, 175bidding procedures to select, 172, 172n24

case studies of reform, 116, 118conditions to examine when considering use of,

171–172customs administration impact, 171evaluation of effectiveness of, 170–172, 170n23international value databases, 174new trends in, 172–173project design omission of, 140revenue impact, 171trade facilitation, 171traders’ behavior impact, 171traditional programs, 169–170

prior exemption vs. drawback, 217–218private sector stakeholders

business partnerships, cooperation with, 275communications with customs services,

32–33, 66corruption and, 18, 85–86, 86b4.11, 87

See also integrity issuesprofessional associations of traders and support

for reforms, 18PSI services, impact on traders’ behavior, 171special services for large traders, 37support for reform from, 18, 22track records of and risk management, 28trader satisfaction with processing in case study

countries, 121–123transit, cooperation for, 264

processing time. See time-release methodologyPRO-Committees in Southeast European countries,

18, 122PSI. See preshipment inspection (PSI) services

quality at entry as part of rating outcome, 143, 143n16

radiation detection pagers, 278RCDP. See Russian Customs Development Projectrecruitment of customs staff, 33–34“Reforming Tax Systems: The World Bank Records in

the 1990s” (World Bank’s Tax Policy and TaxAdministration Thematic Group), 147

regional cumulation, 194–195regional groups

See also specific groups by nameimportance of, 7role of strategic partners, 16–18transit agreements, 260–261

release times. See time-release methodologyrelief goods, 235revenue role of customs, 6, 68

case studies of reform, 118–119, 120t6.3collected tariff rates, 24t1.B.1determining amount of revenue, 105n3as effectiveness indicator, 14–15mobilization enhancement, 9–10, 17, 44PSI services, impact of, 171as share of tax revenue, 5, 23t1.A.1

320 Index

Revised Arusha Declaration on Integrity in Customs, 87See also Arusha Declaration on Integrity in Customs

Revised Kyoto Convention, 53–58anticorruption strategy, adoption of, 75, 87background and purpose of, 52, 53–54, 138, 138n8duty relief regimes and, 216n2elements of, 54–57enforcement issues, 63–64exemptions, 233n20General Annex principles and chapters, 54–57guidelines for, 57information and communications technology

recommendations of, 293legislation consistent with, 59b3.2, 75, 76b4.2, 111as model for preparing modern Customs Code,

57–58, 64, 66, 147–148obligations under, 57–58ratifying countries, 54, 54n6risk management and, 13, 55, 97rules of origin and, 185–187significance of, 5, 8Specific Annexes, 57, 187n4transit provisions, 246

seals, 248, 248b11.2World Bank project design and, 140

Risk-Based Compliance Management Pyramid, 94–97,96f 5.3, 98

risk management, 91–99balanced approach to, 93, 94f 5.2compliance assessment and trade facilitation, 97–98compliance management, 93–94, 95t5.1customs valuation and, 98b5.1development of risk map, 79facilitation and control, 92–93

matrix, 92, 92f 5.1importance of, 92information and communications technology (ICT),

290, 291f 13.1physical inspection as part of, 27–29, 118n15

case studies of reform, 117–118pre-project diagnostic framework and, 133profiles, preparation of, 28putting theory into practice, 94–97Revised Kyoto Convention and, 55, 97risk assessment based on electronic information, 6, 28Risk-Based Compliance Management Pyramid,

94–97, 96f 5.3, 98security issues, 274–275, 276t12.1sequencing of reforms and, 13

Road Transit Customs Declaration (RTCD), 261Romania

See also Trade and Transport Facilitation in SoutheastEurope program (TTFSE)

release-time reduction, 15RTCD (Road Transit Customs Declaration), 261rules of origin, 8, 183–213

See also Agreement on Rules of Origin

checking authenticity and validity of certificates oforigin, 205–206, 205t9.1

costs of administering, 204–208definition of origin, 184–185Doha Development Round and, 208–209economic implications of, 199–200, 200n18, 202–204in existing free trade and preferential trade

agreements, 197–199, 197b9.2, 211t9.B.1fish and EU importing, 192b9.1globalization and, 203methods for determining substantial transformation,

185–187, 210t9.Achange of tariff classification, 185–186, 193,

210t9.Aspecific manufacturing process, 186–187, 193,

210t9.Avalue-added rule, 186, 193, 195, 198, 199, 207–208,

210t9.A, 212nonpreferential, 187–191

capacity building and dissemination of informationprior to implementation, 191

draft harmonized nonpreferential rules of origin(HRO), 189–191, 212

Harmonization Work Program (HWP), 189–190product-specific rules, questions concerning,

189–190, 198operational conclusions, 209, 212overlapping rules from multiple FTAs, 206–207,

207f 9.1, 208t9.3preferential, 186–187, 191–196

absorption (or roll-up) principle, 196cumulation, 194–196, 194n13, 199, 212duty drawback, 196labor requirements to deal with, 206, 206t9.2methods for determining sufficient processing,

191–194restrictive rules, 191, 192b9.1, 209tolerance or de minimis rules, 196, 199,

199n17, 206recommendations for, 212survey on role of customs in checking certificates

of origin, 205–206, 205t9.1utilization of trade preferences and, 200–202

Rules of Origin in a Globalized World: A Work in Progress(Imagawa & Vermulst), 189

Russian Customs Development Project (RCDP), 128,130, 133b7.1

change management and sustainability, 140performance indicators, 135

Russian Federation Customs Modernization Project, 10,64, 65b3.4, 297n3

Rwandaautonomous revenue authority, 41Northern Corridor, 261

SADC. See Southern African Development CommunitySafeTIR, 258, 258b11.4

Index 321

sea cargo, 267–271European Union, 271International Maritime Organization, 266, 267–268United Nations Economic Commission for

Europe, 268U.S. initiatives, 268–271

seals, 248, 248b11.2SECI. See South East Cooperation Initiative (SECI) and

Stability Pactsecurity role of customs administrations, 6, 265–283

air cargo, 271–273European Civil Aviation Conference (ECAC), 272International Air Transport Association (IATA),

266, 271–272International Civil Aviation Organization (ICAO),

266, 271United Kingdom, 272–273U.S. Transportation Security Administration (TSA)

initiatives, 272bilateral security initiatives, 275business partnerships, cooperation with, 275communication re international and bilateral security

initiatives, 275cooperation with stakeholders, 275costs of, 11as effectiveness indicator, 15information flow and access, 274initiatives to improve cargo security, 266–273land borders, 273legislative framework, 274management implications, 273–275national agencies, cooperation among, 275operational conclusions, 281organizational structure, 273–274Panama Canal Authority, 269b12.1Port Risk Assessment (PRA), 281–283

control, audit, and drill, 282–283information and intelligence, 282methodology for, 282personnel, 282procedures, 282technical means, 282

risk management, 274–275, 276t12.1sea cargo, 267–271

European Union, 271International Maritime Organization, 266, 267–268United Nations Economic Commission for

Europe, 268U.S. initiatives, 268–271

strategic and operational planning, 273technical means to assist, 275–281, 277t12.2

central control point (CCP), establishment of, 275container scanning equipment, 278–281costs of scanning equipment, 280explosives detection devices, 278gamma ray inspection systems, 280intrusion-detection technology, 278

manual and low-tech approaches, 276, 278operational considerations for use of scanning

equipment, 280–281radiation detection pagers, 278X-ray inspection systems, 279–280

U.S. customs, 37WCO initiatives, 266–267

SenegalDevelopment Management Project, 129, 148b7.8information technology and GAINDE system,

306b13.5SEPAY (Senegal electronic payment system), 306b13.5sequencing and pacing of reforms, 13–14Serbia

See also Trade and Transport Facilitation in SoutheastEurope program (TTFSE)

cost of collection, 16interagency coordination, 20

SGS. See Société Générale de SurveillanceSingapore

See also Japan–Singapore agreementTradeNet initiative and, 20, 112, 304

smuggling, 108, 118, 119–120, 273See also integrity issues; security role of customs

administrationsSociété Générale de Surveillance (SGS), 173, 173b8.2SOFI (Solutions Françaises Informatiques) and SOFIX,

301, 302b13.3, 308software. See information and communications

technology (ICT)SOLAS. See International Convention for the Safety

of Life at SeaSolutions Françaises Informatiques (SOFI and SOFIX),

301, 302b13.3, 308South Africa

EU–South Africa agreement, 199Walvis Bay Development Corridor (now Trans

Kalahari), 261South Asian Association for Regional Cooperation

(SAARC), 194South East Cooperation Initiative (SECI) and Stability

Pact, 18, 110, 122Southeastern Europe countries. See Trade and Transport

Facilitation in Southeast Europe program(TTFSE); specific countries

Southern African Development Community (SADC),108, 201, 203, 206

South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA), 193, 195

Sri Lanka handling of air express consignments, 97stakeholders’ involvement in customs modernization, 21“Strategies for Landlocked and Transit Developing

Countries” (UNCTAD), 261strategy for modernization, 3–30

checklist of guidelines to define, 29comprehensive vs. partial, 12, 22, 148development of, 12–20

322 Index

diagnostic work and, 9–11, 22, 109b6.1World Bank projects, 129–134, 132t7.3, 134n5,

144–145, 148EC blueprints for accession countries, 11effectiveness indicators, 14–15efficiency indicators, 15–16external advice for, 18–19factors necessary for successful reform, 7–11financing plan of, 19flexible implementation, 21globalization and, 7–8implementation of, 20–21interagency coordination, 7, 19–20International Customs Guidelines of International

Chamber of Commerce, 10Lane’s Customs Modernization and the International

Trade Superhighway and, 10leadership, 20–21, 22objectives of customs operations, 5–7operational conclusions, 22“ownership” of reforms, 22performance indicators for, 14–16, 22physical inspection as part of risk management, 27–29political support and, 8–9, 22private sector stakeholders’ support for, 18, 22realistic approach to reforms, 22reduction of trading costs, 11revenue mobilization and, 9–10role of strategic partners, 16–18sequencing and pacing of reforms, 13–14stakeholders’ involvement, 21time-release methodology, 15, 24–27, 25b1.C.1WCO’s Customs Capacity Building Diagnostic

Framework, 10–11World Bank trade facilitation toolkit and, 10

sustainability of project, 133–134, 140, 148

Tanzaniaautonomous revenue authority, 42b2.3, 43compensation of customs staff, 44, 82b4.8Port Modernization Project, 147b7.7Tax Administration Project, 133b7.1, 140n11trade with Uganda, 108upgrading of infrastructure, 36

TAP. See temporary admission for inward processingtariff reduction, 4TATIS, 301–303tax farming, 44–46, 44n22technical assistance, 4, 18–19, 111

for ACV introduction, 167–168case studies of reform, 125World Bank projects, 129–152, 130t7.1

appraisal of, 151coordination with other donors, 142, 142b7.5, 148with customs component, 129, 131t7.2, 149t7.A.1design of, 129–130, 134–142, 151evaluation of, 151–152

features of, 138–142, 138f7.1, 139t7.6, 141b7.4human resources, 140–141implementation and outcomes, 142–144, 143t7.7,

144–145, 144t7.8, 150–151implementation plans, 141–142integrity issues, 141, 148lessons learned, 145–149objectives of, 134–135, 135n6, 135t7.4, 145performance indicators, 135–138, 136t7.5, 137b7.3,

150, 151pre-project diagnostic framework, 130–134,

132t7.3, 134n5, 144–145, 146b7.6, 148, 151quality at entry as part of rating outcome,

143, 143n16temporary admission, 231–233temporary admission for inward processing

(TAP), 219–224duty suspension scheme, 222, 222b10.3equivalence and prior equivalence, 220–221illustration of successful reform, 221–222, 221b10.2issues, 219manufacturing under bond (MUB), 222–224, 223n6,

224b10.5operational and administrative requirements and

procedures, 219–220passbook, 222, 223b10.4

terrorism. See security role of customs administrationstextiles and clothing

Agreement on Textiles and Clothing, 187, 208EU imports and rules of origin, 200–201NAFTA rules of origin, 197b9.2nonpreferential rules of origin issues,

189–190preferential rules of origin issues, 193

See also cumulation and rules of origin issuesU.S. rules of origin, 201–202

Thailand open bond arrangements for warehousing,232b10.7

Thuronyi, Victor, 59, 62TI. See Transparency Internationaltime-release methodology, 15, 24–27, 25b1.C.1

case studies of reform, 121–123, 121t6.4Crown Agents and, 46customs-oriented approach, 26illustrative results, 26–27reduction in clearance times, 11special services for large traders, 37World Business Environment Survey, 25n21

TIR Convention. See Transport International RoutierTokyo Round

See also Agreement on Customs Valuation (ACV)failure to include in project design, 140objective of, 157n2valuation standards and, 156, 157–158

tolerance rule, 196, 199, 199n17, 202, 206TRACECA, 262trace explosives detection devices, 278

Index 323

Trade and Transport Facilitation in Southeast Europeprogram (TTFSE), 11, 262

case study of reform, 104customs management, 112design, 110enforcement efforts, 121human resources, 114overall reform context, 107physical inspections, 117processing time, 122rapid change, effect of, 108revenue and trade facilitation, 118technical assistance, 111

declarations, number per staff per year, 16, 16f1.1performance indicators identified by, 16, 135, 137b7.3,

262, 263b11.6Regional Steering Committee, 21b1.2time-release methodology of, 25trade facilitation targets of, 15, 262user survey, 21World Bank project, 130, 135, 142b7.5

trade facilitationSee also time-release methodologycase studies of reform, 118–119conducting surveys on, 25as effectiveness indicator, 15effect of, 11priority of, 5–6, 8PSI services, impact of, 171Revised Kyoto Convention and, 55risk management and compliance assessment, 97–98World Bank toolkit, 10

Trade Information Management System (CrownAgents), 115, 300–301

TradeNet initiative, 18, 20, 112–113, 304, 305b13.4traders. See private sector stakeholdersTRADE X system, 306b13.5training of customs staff, 8–9, 34–35

on ACV, 160, 177case studies of reform, 113integrity issues and, 83sequencing of reforms and, 13

transit, 243–264See also Trade and Transport Facilitation in Southeast

Europe program (TTFSE); TransportInternational Routier (TIR)

bilateral agreements, 259–260central customs office (CCO) role, 250–251clearance of procedure, 251computerization and information technologies,

253, 263convoys, 253cooperation between authorities, 260–261corruption, 253, 263costs of transit operations, 244–246, 245n5 & 6,

245t11.1

documentation flow, 248, 250–251, 253, 260duty relief and exemption regimes, 233, 233n19ECOWAS Inter State Road Transit System

(Transit Routier Inter-Êtats, TRIE), 259enforcement problems, 253facilitation institutions, 259–262, 264guarantees, 248, 250, 252, 254b11.3, 255, 261, 263, 264history of transit procedures, 246b11.1implementation issues, 252–253international conventions’ provisions, 246–247,

247t11.2nonclearance of procedure, 251–252one-stop border posts, 260–261operational conclusions, 263–264principles of transit regimes, 246–247public-private cooperation, 264quality of transport services, 252–253regional agreements, 260–261Road Transit Customs Declaration (RTCD), 261seals, 248, 248b11.2TRACECA, 262transit corridors, 261–262typical operations, 247–253, 249t11.3, 252f11.1

Transit Routier Inter-Êtats (TRIE), 259, 260Trans Kalahari Corridor Memorandum of

Understanding, 261translation of legal concepts, 63transparency, 75–76, 77b4.3, 123Transparency International (TI), 70, 70n1Transport International Routier (TIR), 108, 254–259

advantages of, 258–259attempts to duplicate elsewhere, 259insurance policies, 255international and mutual recognition of customs

control measures, 255international guarantee valid throughout journey, 255national associations of transport operators, 255SafeTIR, 258, 258b11.4scope of use, 255secure vehicles, 254–255sequence of transit operation under, 255–259,

256f11.2TIR Convention, 254–255Unique Consignment Reference Number (UCR)

of WCO, 258, 259b11.5treasury voucher system, 237–238TRIE. See Transit Routier Inter-ÊtatsTRIPS Agreement, 64, 75, 76b4.2TTFSE. See Trade and Transport Facilitation

in Southeast Europe programTunisia Export Development Project, 129, 135,

140, 141b7.4Turkey, 104

adoption of new Customs Code, 75, 79, 112corruption and integrity issues, 114customs management, 112

324 Index

design, 110economic and population characteristics, 105, 106t6.1enforcement efforts, 120fiscal performance, 106, 106t6.2, 119, 120t6.3human resources, 113information technology, 114, 115, 115b6.2, 296b13.1,

302b13.3costs of, 308World Bank assistance, 131n4

objectives of reform, 108, 109overall reform context, 107physical inspections, 117, 118political support and sponsorship, 110private sector stakeholders’ support for reform,

18, 123processing time, 121t6.4, 122Public Financial Management Project, 130, 131n4,

135, 142b7.5regional and preferential arrangements, 108revenue and trade facilitation, 118technical assistance, 111trader satisfaction with processing, 123transparency in customs administration, 76valuation issues, 117

Turnbull, Ian, 6024-Hour Advance Manifest Rule, 268, 270

UCR. See Unique Consignment Reference NumberUDEAC (Customs Union of Central African

States), 157Uganda

adoption/revision of Customs Code, 79, 112autonomous revenue authority, 41, 42b2.3, 43, 44,

107n5, 110, 112, 113, 124b6.5compensation of customs staff, 43, 44, 82b4.8corruption and integrity issues, 108, 114,

123, 124b6.5customs management, 112design, 110economic and population characteristics, 105,

106t6.1enforcement efforts, 120fiscal performance, 106, 106t6.2, 107, 119, 120t6.3human resources, 113information technology, 114, 115intelligence and investigative function,

118–119, 119Northern Corridor, 261objectives of reform, 108overall reform context, 107physical inspections, 118political support and sponsorship, 110processing time, 121t6.4, 122PSI company services, 116regional and preferential arrangements, 108revenue and trade facilitation, 118

technical assistance, 111trader satisfaction with processing, 123valuation issues, 117

UNECE (United Nations Economic Commission for Europe), 268

Unique Consignment Reference Number (UCR),258, 259b11.5

United KingdomSee also Department for International Development

(DFID)air cargo, 272–273autonomous revenue authorities’ model from, 40“known shipper” program, 272–273possible merger of customs with revenue agency,

38n12tax farming, 44

United Nations Conference on Trade and Development(UNCTAD)

computer systems and software (ASYCUDA), 111,115, 253, 299–300, 308

customs services improvement efforts of, 4“Strategies for Landlocked and Transit Developing

Countries,” 261study on release time in Zaire, 15study on utilization rate for LDCs, 201study on value-added vs. regional cumulation, 195

United Nations Economic Commission for Europe(UNECE), 268

United Nations Security Council Resolutions 1373 and 1456, 266

United Statesair cargo, 272Aviation Security Advisory Committee (ASAC), 272clothing imports and rules of origin, 201–202Container Security Initiative (CSI), 268, 270Customs and Border Protection, Bureau of (CBP),

268–271Customs-Trade Partnership Against Terrorism

(C-TPAT), 268–270enforcement of laws, 62, 62n40full cumulation, 195General System of Preferences (GSP), 201Homeland Security, Department of, 3796-Hour Notification of Arrival (Coast Guard

initiative), 270–271rejection of BDV standard, 157sea cargo initiatives, 268–27124-Hour Advance Manifest Rule, 268, 270

Uruguay information technology system, 297Uruguay Round

rules of origin under, 188–189, 208shifting burden of proof, 158, 163, 174, 175valuation standards and, 156

U.S.–Chile agreement, 199U.S. Maritime Transportation Security Act, 268U.S.–Singapore FTA, 197

Index 325

valuation issues, 8, 155–182See also Agreement on Customs Valuation (ACV);

Brussels Definition of Value (BDV)case studies of reform, 116–117checklist, 180historic overview, 156–158improvements in practices, 163–168

creation of value database, 165–166, 174minimum values and reference prices, 167modernizing customs administration, 164reforming tariff and trade regime, 164strengthening organization and infrastructure, 164technical assistance, 167–168

international standards, 156–158operational conclusions, 174–175PSI services, use of, 168–174, 175

See also preshipment inspection (PSI) servicessignificance of, 156underinvoicing, 156

value-added rules, 186, 193, 195, 198, 199, 207–208,210t9.A, 212

VAT collection, 5, 6, 287

Walvis Bay Development Corridor (now TransKalahari), 261

warehousing, 230–231open bond arrangements, 232b10.7

WCO. See World Customs OrganizationWeb sites, use of, 76, 86West African Monetary Union, 201World Bank, 127–152

See also specific projectsappraisal of projects, 151autonomous revenue authorities, support for, 40corruption defined by, 71customs services improvement efforts of, 4, 12,

19, 128–129costs of, 19rationale and lending instruments, 128–129reforms of specific countries due to, 109scope and distribution of Bank assistance, 129technical assistance, 111

diagnostic workpre-project, 129–134, 132t7.3, 133b7.1, 134n5,

144–145, 146b7.6, 148recognized as need by, 9

evaluation of projects, 151–152Global Economic Prospects 2004 Report (GEP), 11information technology guidelines, 294Investment Climate Surveys, 68project design, 129–130, 134–142, 151

change management, importance of, 140, 145, 149donor coordination, 149exit strategy, 149features of, 138–142, 138f7.1, 139t7.6integrated approach, 140, 141b7.4

objectives of, 134–135, 135n6, 135t7.4, 145performance indicators, 135–138, 136b7.2, 136t7.5,

137b7.3, 150political support, 149

project implementation and outcome, 142–144,143t7.7, 144t7.8

correlation estimation, 150–151factors affecting outcome, 144–145

recruitment of customs staff, survey on, 83, 83n9“Reforming Tax Systems: The World Bank Records

in the 1990s,” 147structural adjustment loans (SALs), 129survey on role of customs in checking certificates

of origin, 205–206, 205t9.1technical assistance loans (TALs), 129, 137technical assistance projects. See technical assistancetime-release analysis by, 26trade facilitation toolkit, 10

World Business Environment Survey, 25n21World Customs Organization (WCO)

See also Revised Kyoto ConventionAdvance Cargo Information Guidelines, 267Arusha Declaration on Integrity in Customs, 68,

72–87, 114, 114n10corruption defined by, 71Customs Capacity Building Diagnostic Framework,

10–11customs services improvement efforts of, 4Expert Working Group on commercial fraud, 63information and communications technology

recommendations of, 293Integrity Action Plan, 74Integrity Development Guide, 74, 86–87, 87n12Intellectual Property Rights Model Legislation, 64International Convention on Mutual Administrative

Assistance in Customs Matters, 167n18International Convention on the Harmonized

Commodity Description and Coding System(Harmonized System), 8

legislative role of, 31n1, 53, 64Model Bilateral Agreement on Mutual Assistance, 167Model Code of Ethics and Conduct, 74, 80, 114Risk Management Guidelines, 27security initiatives of, 6, 266–267survey on role of customs in checking certificates

of origin, 205–206, 205t9.1Technical Committee on Customs Valuation, 166Technical Committee on Rules of Origin (TCRO),

188, 189, 189n6time-release analysis by, 26Unique Consignment Reference Number (UCR), 258,

259b11.5World Economic Forum’s Global Information Technology

Report 2003–2004, 289World Trade Organization (WTO)

See also Agreement on Customs Valuation (ACV)

326 Index

Agreement on Preshipment Inspection,168, 170n22

Agreement on Rules of Origin, 8, 186Committee on Customs Valuation, 166Committee on Rules of Origin (CRO), 188, 189,

189nn8 & 9Export Subsidies and Countervailing Duties rules, 217Ministerial Conference in Cancun (2003), 4, 5Philippines trade reform compliance with, 107

X-ray inspection systems, 279–280

Yugoslav Customs Code, 52b3.1

Zairecustoms staff rotation, 33n3release time, effect of, 15upgrading of infrastructure, 36

ZambiaASYCUDA operations, 254b11.3autonomous revenue authority, 41, 42, 43

commitment to integrity, 76zero tariff rates, 233n21

Index 327

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