Outsourcing Customs Inspections: Integrity for Hire

Last week I described Guatemala’s innovative approach to attacking grand corruption.  Rather than relying on domestic agencies, whose personnel may either be bought off or scared off a case, Guatemala has turned over responsibility for investigating massive theft by senior civilian and military leaders to an agency headed by an appointee of the U.N. Secretary General.  Accountable not to the Guatemalan government but to the United Nations, the Commission Against Impunity, at it is called, develops cases of grand corruption and then works with the Guatemalan Attorney General to see the accused individuals are prosecuted.  What the government of Guatemala has in effect done is outsource the investigation of allegations of grand corruption to a third-party. While countries where grand corruption is deeply ingrained would do well to adopt their own version of an impunity commission, the political obstacles to do so are steep – beginning with the fact that many of those likely to a target of the third-party would have to agree to its creation.

There are other, less controversial ways the outsourcing solution can be employed to tackle corruption.  One that deserves far more attention than it has received is to hire a private firm to inject a dose of integrity into the processing of imported goods. 

Corruption in customs can be enormously costly with estimates from the early 2000s suggesting developing states have lost billions of dollars in revenue thanks to corrupt customs agents.  Customs is a “soft target” for corrupt officials and businesses, as most recently underlined in a June 2015 World Bank study of corruption in the Tunisian customs agency, because of how the customs process works. Import duties are based on the amount of product imported and the value, and customs inspectors, who often work alone, can be bribed to understate either how much is being brought into the country or how much it is worth or both.  A shipment of 10,000 computers worth $3,000 each could be recorded as a shipment of 100 computers worth $500 each, sharply reducing the duty to be paid and with enough for a sizable bribe for the corrupt inspector.

This form of corruption can be sharply curtailed, if not defeated altogether, by hiring a private firm to inspect the goods before they are shipped.  The firm examines the shipment either at the premises of the exporting firm or the port of departure and issues a statement showing what is being shipped, in what quantities, and what the values are.  The firm will in many cases then place a tamper resistant seal on the shipping containers.

The inspecting firm does not collect the duty.  That remains the responsibility of the customs agency in the importing country.  The statement the firm prepares before the goods are shipped can then be compared with the duty levied on the shipment to see if there is any variation.

University of Michigan Professor Dean Yang conducted a rigorous evaluation of the effect of preshipment inspection across 19 developing states in Africa, Asia, and Latin America.  In “Integrity for Hire,” the study from which the title of this post was filched, he found that they were a cost-effective way to increase revenues, boosting import duties by anywhere from 15 – 30 percent.  The most likely reason for the increase: “reductions in the falsification of import documentation . . .and declines in underinvoicing and misreporting of goods classifications in customs.”

To be sure, as he and Mohini Datt warn in a follow up study (chapter seven of a World Bank/Center for Economic Policy volume) preshipment inspections are not foolproof.  A comparison of the statement issued by the inspecting firm against what duty is levied must be made, and where there is a difference, action must be taken.  So honesty is required somewhere in the process.  Moreover, corrupt importers and customs officials will exploit any loopholes in the preshipment inspection regime.  In the Philippines, only shipments valued at more than $50,000 were subject to preshipment inspection, leading to a raft of shipments just under the $50,000 threshold.  In Columbia, when some types of goods were inspected before shipment and other types not, there was a sharp upsurge in the import of goods exempt from inspection and a corresponding drop in those subject to preshipment inspection.

One concern with the preshipment inspection service model is that the firm hired to conduct the inspection may itself be corrupt.  This has not been a problem so far.  The most likely reason is that the work is done by a handful of large firms all of which value their reputation for integrity.  That reputation ensures a steady stream of work conducting preshipment inspections and related tasks the value of which exceeds any short-term gain that could be realized from a corrupt deal.

A second concern is that preshipment inspection can undermine efforts to build corruption free national customs agencies.  Why spend money on training current staff, introducing IT, and hiring better staff if outsourcing will do the trick?

The standard response is that strengthening customs services can proceed in parallel and responsibility for valuing shipments turned completely over to national staff at some point.  (Click here for a 2004 World Bank volume of case studies listing several examples where this was the goal.)  A less standard answer is that nowhere is it written that to be a full-fledged, sovereign nation a government must have its own customs service. It is not required for membership in the United Nations; nor is it a criterion for borrowing from the World Bank and other international financial institutions or for receiving development assistance.  And as smaller, poorer countries with a scarcity of trained nationals struggle to contain corruption and meet their citizens’ needs, there is no reason why they should not take advantage of the benefits of preshipment inspections and indeed other ways to outsource the customs function for an extended period of time.

1 thought on “Outsourcing Customs Inspections: Integrity for Hire

  1. Pingback: Sharing Responsibility for Managing the Public Fisc: Another Way to Borrow Integrity | GAB | The Global Anticorruption Blog

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