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 to Corruption 69
4.2 Strategies to Reduce Corruption in Customs 73
LIST OF BOXES
4.1 Leadership and Commitment: Key Issues and Questions 75
4.2 Regulatory Framework: Key Issues and Questions 76
4.3 Transparency: Key Issues and Questions 77
4.4 Automation: Key Issues and Questions 78
4.5 Modernization of Customs: Key Issues and Questions 79
4.6 Audit and Investigation: Key Issues and Questions 80
4.7 Code of Conduct: Key Issues and Questions 81
4.8 Are Low Salary Levels Really a Factor? 82
4.9 Human Resources: Key Issues and Questions 84
4.10 Morale and Organizational Culture: Key Issues and Questions 85
4.11 Relationship with the Private Sector:
Key Issues and Questions 86
4.12 Lessons Learned from Customs Reforms to Control Corrupt Behavior 88
In many developing countries, high levels of corrup-tion drastically reduce the effectiveness of key public sector agencies. Customs administrations are no exception and are frequently cited as among the most corrupt of all government agencies. Given the vitally important role customs plays in revenue collection, trade facilitation, national security, and the protec-tion of society, the presence of corrupprotec-tion in customs can severely limit a nation’s economic and social prospects and national development ambitions.
This chapter describes the scope and nature of the corruption problem in customs and identifies a range of practical approaches that can be employed to address it. The chapter is designed to provide a comprehensive framework for analyzing the poten-tial effectiveness of a range of anticorruption strategies and provides practical guidance and advice to customs officials, consultants, donors, and other stakeholders engaged in the identifica-tion and implementaidentifica-tion of sound anticorrupidentifica-tion and integrity development strategies.
Attempts to deal with corruption in the past have often been frustrated by well-intentioned but totally
The author gratefully acknowledges the contribution of Michel Zarnowiecki.
ineffective calls for the adoption of industrial coun-tries’ standards of administrative honesty, effective-ness, and efficiency or, perhaps, the adoption of quick fix solutions designed to work around rather than deal with the problem. Recourse to preship-ment inspection services has at times been inspired by such motives. To effectively tackle the problem of corruption in customs, a comprehensive and sus-tainable approach that addresses the underlying causes and consequences is required. There are no quick fix solutions. Rather, a pragmatic and situation-specific approach is necessary—one that draws on the lessons learned from previous efforts around the world and that takes into account the fundamental issues of motive and opportunity.
The first section of this chapter provides an intro-duction to the nature of the corruption problem in customs and describes some important considera-tions to take into account when framing an effective anticorruption strategy for customs. It also provides an overall framework based principally on the work of scholars such as Robert Klitgaard. The second sec-tion reviews the internasec-tional customs community’s response to the problem and outlines a comprehen-sive 10-point framework for tackling corruption, as contained in the World Customs Organization’s (WCO’s) Arusha Declaration on Integrity in Cus-toms. The section also provides some practical guidelines on how to develop, implement, and mon-itor a national customs integrity action plan and how to establish a process and sustainable culture of continuous improvement. A series of key issues and questions are included in a simple checklist for each of 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 Corruption in Customs
Customs plays a central role in every international trade transaction and is often the first window through 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 World Bank’s Investment Climate Surveys indicate that 40 percent of firms included in the 80-country survey rate Customs/Trade regulation as a major or moder-ate constraint to business investment (World Bank 2003). As business and investment decisions by
multinational companies are increasingly subjected to 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 the current environment of heightened concern about the security of international trade. Sophisticated sys-tems and procedures designed to detect weapons of mass destruction will offer little protection if they can be 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 WCO suggest that in many countries customs collects over 50 percent of all government revenue (WCO 2003a), and delays in the processing of imports and exports can cause significant losses, increase the cost of doing business, affect the competitiveness of a country’s firms, and scare away foreign invest-ment. The presence of widespread corruption can, therefore, destroy the legitimacy of a customs administration and severely limit its capacity to contribute to government objectives. The adverse effects of corruption within a customs administra-tion include the following:
• a reduction in public trust and confidence in government 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(although this is both an effect and a cause)
• a reduction in the level of voluntary compliance with customs laws and regulations by the busi-ness sector
• a reduction in national security and community protection
• the maintenance of unnecessary barriers to international trade and economic growth
• increased costs, which are often borne by the poorest sectors of the community.
Most, if not all, customs functions are susceptible to corruption; however, the following activities are fre-quently cited as being particularly vulnerable as they provide both a motive for unscrupulous traders to circumvent customs regulatory requirements and an opportunity for corrupt customs officials to seek bribes. Table 4.1 lists a number of areas and examples
TABLE 4.1 Customs Functions and Their Vulnerability to Corruption
Selected Customs Functions Examples of Integrity Violations Processing of import, export, and
transit declarations
Assessment of origin, value, and classification of goods
Physical inspection, examination, and release of cargo
Administration of concessions, suspense and exemption schemes, and drawback schemes
Conduct of post-clearance audits
Issuing of import licenses, warehouse approvals, and authorized trader status approvals
Processing of urgent consignments
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 that entered under suspense regimes or goods made with inputs that entered under such regimes
• obtain a release of the bond that is to protect customs revenues in cases of temporary admission of imports without adequate documentation
• permit traders to claim excessive input coefficients for exports produced with inputs that benefited from the suspense regimes
• permit traders to claim drawbacks for fictitious exports
• permit importers to transfer imports that benefited from duty relief to nonauthorized users or for nonintended purposes, or permitting them to import such goods in excess of the amounts agreed to.
Soliciting or accepting payments to influence the outcome of the audit findings.
Soliciting or accepting payments to obtain these licenses and certificates without proper justification.
Soliciting or accepting payments to obtain preferential treatment or speedy clearance.
where corruption can take place in customs. This list is not intended to be exhaustive.
Customs is vulnerable to corruption because the nature of its work puts its officials, even at junior levels, in situations in which they have sole author-ity and responsibilauthor-ity; in which they are authorized to make important decisions on the level of duty or taxes or admissibility of imports and exports; and in which careful supervision and accountability is difficult. In addition, they work face-to-face with members of the trading community who have a strong incentive to influence the decisions made by customs officials. High tariffs and complex regula-tions offer significant incentives for traders to try to reduce import charges and speed up transactions.
That many officials are poorly paid is often a strong incentive to accept or solicit bribes in the execution of their duties.
Types of Corruption in Customs
Irene Hors, of the Organisation for Economic Co-operation and Development (OECD) Develop-ment Centre, has identified three types of corrup-tion that typically occur in the customs working environment and suggests that the strategies neces-sary to deal with the three types of corruption vary significantly (Hors 2001):
• routine corruption, in which private operators pay bribes to obtain the speedy completion of routine customs procedures
• fraudulent corruption, in which the trader or agent asks customs officials to turn a blind eye to certain illegal practices to reduce taxation liabil-ity or fiscal obligations
• criminal corruption, in which criminal opera-tors pay bribes to conduct a totally illegal but lucrative operation, such as drug trafficking or the abuse of export promotion schemes.
Transparency International1(TI) takes a different approach and divides corruption into two broad types: petty corruption and grand corruption (TI 1997). Petty corruption is described as “survival”
corruption—a form of corruption that is most
often pursued by relatively junior civil servants who may be grossly underpaid and who depend on small but illegal rents to feed and house their families and pay for their children’s education. This corresponds closely 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 to deal with the two types of corruption.
Without attempting to be exhaustive, it is useful to consider a further classification of corruption that has practical applications to the customs work-ing environment, namely, bribery, nepotism, and misappropriation (Nye 1977).
Bribery in the customs context includes the pay-ment of money to secure or facilitate the issuance or processing of licenses, clearances, and authori-ties; payment to alter or reduce duty or taxation lia-bilities; payment to ensure that officials turn a blind eye to illegal activities; and payment or kickbacks provided after the fact, to ensure that an individual successfully obtains a lucrative exemption from normal administrative formalities. Customs offi-cials often have discretion over such disbursements and may be tempted to corruptly charge monopoly rents. For example, in the Philippines prior to the reforms of the late 1990s, customs officials seemed to consider that they had the right to obtain com-pensation for their services. Businesses had become accustomed to giving small bribes as part of their standard operating procedures. It was generally accepted that it was necessary to pay someone to
“facilitate” even fully legitimate transactions, and to have the services of someone personally friendly with customs to avoid harassment. In Bolivia, before the reform of the late 1990s, many customs staff worked pro bono and had to find compensa-tion by soliciting and accepting facilitacompensa-tion money—an officially sanctioned bribery system.
Nepotism in the customs context can include such behavior as the selection, transfer, or promo-tion of individuals or groups on the basis of an existing relationship rather than on merit; the awarding of lucrative customs appointments; and the allocation of scarce government resources to individuals on a nonmerit basis. Nepotism is most
2. The terms “routine” and “petty” are used to describe a partic-ular form of corruption that is prevalent in many countries. The impact of such corruption is, however, far from inconsequential and is frequently extremely damaging and difficult to control.
1. Transparency International is a nonprofit organization based in Berlin with chapters in more than 60 countries. Its focus is on corruption prevention at the international and local levels. Its Corruption Perception Index is the most comprehensive quanti-tative indicator of cross-country corruption available.
often seen in the customs administrations of microstates or in larger administrations that have border posts that are geographically remote from headquarters. Under such circumstances, customs officials often develop close bonds with members of the small communities in which they live and work and find it extremely difficult to maintain an arms-length relationship with members of their extended family or with members of the social or ethnic groups to which they belong.
Misappropriation includes a wide range of behavior such as theft, embezzlement, falsification of records, and fraud. It can be seen at the individ-ual, group, or organizational level. While this form of corruption has been reported in many industri-alized countries, it is also a common factor in the customs administrations of many developing countries in which administrative controls or checks and balances are not always present and where systems to ensure appropriate supervision and audit of financial transactions are not well developed.
Corrupt behavior can range from the individual to the widespread and systemic. Many observers note that corruption in customs is often well organized into networks, with members of the net-works sharing the obligation of distributing the profits from corrupt practices with colleagues and superiors. This safeguards and protects the network from outside intervention and disruption, render-ing its eradication extremely difficult. Corruption can be initiated by either the client or the agent (it takes two to tango); can entail acts of omission or commission; can involve illicit or licit services; and can be practiced both inside and outside the organ-ization (Klitgaard 1993, p. 221).
Definition of Corruption
The World Bank and the WCO define corruption simply as “the misuse of public power for private benefit” (World Bank 2000). This definition focuses on the departure from, or contravention of, some form of public duty, and the provision or receipt of some form of improper inducement.
Criminal and fraudulent corruption mostly takes place 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 this practice is so widespread and such a central ele-ment of the working relationship between customs officials and members of the business community that it has become a quasi-accepted practice. Fre-quently, the proceeds of the facilitation payments are pooled and shared among colleagues and supervisors, often according to a well-specified formula.
An Analytical Framework for Understanding Corruption
A useful analytical framework to analyze corrup-tion is proposed by Robert Klitgaard (1988).3 Klitgaard suggests that corruption is most likely to occur when agents (individuals or groups) enjoy monopoly power over clients, when agents enjoy discretionary power over the provision of goods or services, and when the level of accountability is low.
According to this framework, the probability of corruption occurring follows a simple equation:
Corruption Monopoly Discretion Accountability (C M D A)
This framework has particular relevance for the customs environment where, due to an administra-tive monopoly, customs administrations are often the only agency with responsibility for certain administrative and regulatory functions; where customs officials, at even relatively junior levels, enjoy considerable discretionary decisionmaking power, and discharge important administrative functions; and where the level of supervision and accountability is often poor.
Klitgaard’s framework has been influential in shaping the direction of the anticorruption efforts in several countries and has been used extensively in the development of the WCO’s Revised Arusha Declaration on Integrity in Customs, as well as in a range of the WCO’s integrity-related tools.
3. Klitgaard’s conclusions accord closely with those of Irene Hors of the OECD Development Centre. Hors, drawing on the lessons learned from the anticorruption and modernization efforts in the customs administrations of three countries, con-cluded that the customs working environment is vulnerable to corruption because there is (a) a discretionary interface between customs officials and private sector operators, (b) a possibility for 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 involved in developing a sound anticorruption strategy.
Inspired by this framework, Klitgaard proposes the following range of corrective strategies. His strategies consist of five distinct but related steps.
These include
• changing administrative systems to remove the corruption-inducing combination of monopoly power combined with officer discretion plus limited accountability
• selecting agents (in this case, customs officials) for incorruptibility as well as job-specific skills and educational qualifications
• changing the rewards and penalties mix facing agents and clients
• increasing the likelihood that corruption will be detected and punished
• altering attitudes toward corruption.
Klitgaard’s strategies and examples of their practi-cal application in the customs environment are illustrated in table 4.2.
The International Customs Response
The vast majority of literature available on institu-tional or administrative corruption in developing countries can be described as problem reporting rather than problem solving. Beyond advocating the introduction of effective and efficient customs cedures, there is little material available that pro-vides practical solutions to the problems associated with predicting, controlling, and eliminating cor-ruption in public administration, particularly in the customs environment. In response to this, and in recognition of the fact that customs is often cited as one of the most corrupt sectors of government, the international customs community, through the WCO, commenced work in the mid to late 1980s to formulate a comprehensive integrity and anticor-ruption strategy. This work resulted in 1992 in the unanimous adoption by World Trade Organization (WTO) members of the Arusha Declaration on Integrity in Customs. Since that time, the Arusha Declaration 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 the Arusha Declaration and its practical implementa-tion in member administraimplementa-tions. This led to the preparation of the Revised Arusha Declaration that was unanimously endorsed by the WCO Council in June 2003.
The Revised Arusha Declaration on Integrity in Customs consists of 10 distinct but related ele-ments considered essential for the development and implementation of a comprehensive and sus-tainable anticorruption and integrity enhancement program. It is consistent with the framework pro-vided by Klitgaard and is closely aligned with a range of internationally agreed on customs instru-ments, standards, and best practice approaches, including the Revised Kyoto Convention. It is also designed to strike an appropriate balance between the positive strategies (reform and modernization, leadership, progressive human resources [HR]
management policies, and so forth) favored by many within the international customs community and 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 to reduce monopoly power and the inappropriate use of official discretion, and at the same time increase the level of practical accountability. They link directly to Klitgaard’s equation and strategies out-lined earlier in this chapter. In developing the Revised 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 the Declaration to be nonprescriptive in nature. In other words, the Declaration provides a compre-hensive conceptual framework, but the actual