An Inside View of Corruption in a Tax and Customs Agency

Information derived from the direct observation of corrupt behavior provides insights no other source can match.  From first-hand reports of the number and amount of bribes Indonesian truck drivers paid to traverse different provinces, Barron and Olken reached important conclusions about centralized versus decentralized bribery schemes. Data Sequiera and Djankov gathered from South African and Mozambican clearing agents on bribery at their nations’ ports and border posts allowed the two to show how differences in tariff rates and uncertainties over the expected bribe amount affected firms’ behavior. The resourcefulness these and other researchers displayed in compiling direct evidence of corruption and the thoughtful, sometimes counter-intuitive conclusions their analysis yielded are summarized in this first-rate review essay by Sequiera.

As rich a source of learning on corruption as it is, collecting direct observation data is no mean feat.  Those committing corruption crimes don’t generally invite nosy observers to watch and record their actions. That is why it was especially welcome when a friend and colleague shared the parts of an interview with the head of a Latin American customs and tax agency that touched on corruption. The agency head’s insider view, though informed by training as a professional economist and a background in academia, offers nothing close to what readers can take from Barron and Olken, Sequiera and Djankov, and other full-blown academic studies.  Nonetheless, what he reports raises interesting, provocative issues of use to reformers and to those looking for hypotheses worth testing.

The portion of the interview dealing with corruption, anonymized to protect the source, is below.  Would other insiders please come forward?  Again, it is doubtful your observations will be anywhere near as valuable as the data the Barrons, Olkens, Sequieras, and Djankovs of  the world have so cleverly and painstakingly collected, but in an information scarce environment, all contributions are welcome. GAB would be more than happy to publish what you have observed about corruption in your organization with safeguards to protect your identity.

Interview notes from head of Latin American tax and customs agency

As agency head, he makes a reasonable salary but much less than when he was a professor at the nation’s leading university.

The agency is extremely corrupt.  Previous heads, who served no more than 2 years, were non-entities from lower class backgrounds.  They stole money for themselves, but the agency’s corruption was highly decentralized.  The director might get money from below, but he knew little about how much his subordinates were receiving or what particular methods they used to get the money.

The legislature had control of the agency and appointed many of the managers.  Particular positions belonged to specific legislators (perhaps to specific electorates).  The director spoke of one legislator who pounded the table and said a certain customs post “belonged to him,” and no one had the right to appoint an individual to that position without consulting him.

What the interviewee found so intriguing was that the bribes were so small.  His estimate (likely back-of-the envelope guess) was that total bribes agency personnel collected was on the order of $500 million.  The result was individuals and firms evaded some $15 billion in tax and customs duties.

He argued to legislators that they should support a crackdown on bribery.  It would be to their advantage to have $15 billion more in revenue from which they could steal.  It would dwarf whatever share of the $500 million they now received.  The legislators were unconvinced, but he has survived, both politically and physically.

He fired 1100 officials when he came into office. The head of government had agreed that he would be left alone to clean up the mess [editor’s note: the integrity of the then head of government was questioned throughout his term]. The interviewee has increased the tax take from 12% of GDP to 15%, a figure he considers still shockingly low.

Asked why the previous system had been so poor at collecting its share of the evaded taxes and why the superiors had not done better at monitoring and extorting their corrupt underlings, he said he thought the miserly $20 million that the agency heads had collected was so much more than they had imagined ever earning that they did not look for more.  [Editor’s note: the interviewer did not think this was particularly persuasive.]

Nor could the agency head explain why the head of government had appointed him.  The interviewee had served as deputy finance minister at one time but had paid no attention to revenue collection.  The tax and customs agency was known to be a dirty agency and so he had not wanted to take the job when offered it three years ago.  He didn’t explain why he did.   He said that the IMF had been extremely helpful; it is clear that he still does not have a strong office around him.

1 thought on “An Inside View of Corruption in a Tax and Customs Agency

  1. Thank you so much for this fascinating post. I found it striking that the puzzle seems to be how low the prices of corruption are, rather than the inability to stop it. In thinking about possible explanations, I was wondering what the career paths of agency heads are. If they often secure jobs in the industries they regulate after leaving government, they may have some incentive to keep the price of corruption relatively low. In that case, they will benefit personally from having to pay so much less in taxes, and may be willing to forego some bribe income upfront. I don’t know if this makes sense in the context of the country in question, but I’m certainly interested in the puzzle this case presents.

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