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INTERNATIONAL ANTI-CORRUPTION CONFERENCE (IACC)
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8th INTERNATIONAL ANTI-CORRUPTION CONFERENCE

The Papers


Practical Measures to Promote Integrity
in Customs Administrations


John Crotty
Chief Tax Administration Division
Fiscal Affairs Department
International Monetary Fund


The purpose of this paper is to outline an approach to promoting integrity (reducing corruption) in customs administrations. while it outlines some of the general factors that lead to corruption, the paper does not deal at length with the reasons for or causes of corruption nor the economic impact of such practices. It accepts, as a given, that the incentives and opportunities exist in all revenue- collecting agencies to engage in corrupt practices and, based on this premise, attempts to provide the framework for the legal and administrative procedures that are necessary to detect, punish, and reduce such undesirable behavior.

The paper draws upon the experiences of the Tax Administration Division of the Fiscal Affairs Department. In this respect, it reflects not only the technical assistance advice provided to various countries but also the experiences of staff of the division in dealing with issues of corruption in the management of revenue departments in their own countries.[1] Its central theme is that there is no easy or quick solution to the issue of integrity in customs administrations (e.g., higher salaries or computerization) but that a comprehensive approach is necessary to put the required measures in place and to ensure that they operate effectively over time. Following a brief summary of the principal causes of corruption, the paper acts out the main elements of a plan to promote integrity in the customs administrations, namely: a clear, well understood policy framework; simple, transparent procedures; a professional customs administration; performance standards; code of conduct; effective internal audit; and administrative autonomy. In support of these elements, there should also be an atmosphere that encourages members of the trade community to come forward and discuss issues with the administration, an independent, honest judicial system, and a press that is interested, able, and allowed to raise issues of corruption.

Causes of corruption

In reviewing the causes of corruption, it is important to address not only the overall factors which may lead to corrupt practices but also the specific nature and causes of corruption in customs administrations. General factors include: extensive intervention of the Government in the economy; cultural norms and practices that influence the behavior of administrators; centralized decision making; excessive discretionary power in the hands or administrators; lack of supervision and guidance; lack of accountability, and inadequate control systems. In addition to these general factors, incentives and opportunities to engage in corrupt practices exist far more in revenue administrations than in many other administrations. Nobody likes to pay taxes. Therefore, the taxpayer will take every opportunity and make every effort to reduce the tax burden, including, if necessary, the bribing of a revenue official. In the case of customs transactions, the incentive goes beyond just the desire to reduce the tax burden, as the importer is also interested in obtaining the goods as fast as possible and may take the opportunity to "facilitate" their release.

The most important factors that lead to lack of integrity in the administration of duties and taxes include:

Building a system to promote integrity

Building a system to promote integrity in customs administration requires not only the effort to put in place the necessary measures to combat corruption but also on-going vigilance to ensure that the measures continue to operate as intended. Even in those countries that are considered to have the most efficient and honest administrations, considerable effort is still invested to ensure that the controls continue to operate and that corrupt behavior is detected and dealt with. Threats are always present. For exampte7 in countries with generally low tax and tariff rates, criminals involved in drug smuggling have the ability to pay large amounts of money to a customs officer to allow a shipment to proceed without inspection.


It can’t happen here

In one country that has a reputation for integrity in its public service, in general, and the customs administration, in particular, recent cases of collusion with organized crime have been detected related to the smuggling of goods with high excises. When this was discovered, there was, on the one hand, shock that such practices had taken place, and on the other hand, satisfaction that the systems were in place to discover the corrupt behavior.
       In order to deal effectively with corruption, at the outset, there must be a commitment from the Government to address the problem. This goes beyond mere statements that corruption will not be tolerated to the actual actions of Ministers and other high ranking government officials. Too often these officials believe and act as if they are above the law and demand special treatment from customs officials (e.g., proceeding through customs without paying duty). Given this atmosphere a Government cannot, in all honesty, expect a customs administrator to collect duties and taxes from every other importer. Once the commitment has been made, there are certain essential actions that must be undertaken to build a system that has integrity and that will produce the returns expected by the Government. Most of these involve designing measures to reduce the incentives and opportunities to engage in corrupt practices and, at the same time, creating organizations that are interested and committed to doing a good job.

1. Clear, well understood policy framework

Simplification of the tax system (e.g., reducing the number of rates to the minimum and restricting exemptions) is not only good economic policy but it £50 reduces the opportunities for corruption. From a customs administrators point of view, simple, clear legislation creates the framework for the development of systems and procedures that are easily understood by both the trade community and the officials. This policy framework should be based on the following principles:


One administrator’s
experience

In response to a question concerning the impact of the newly implemented VAT on customs administration, the head of one local office in an eastern European country responded, "The tax is easy to administer because there is only one rate and the exemptions are provided for in the law. There is no room for negotiation."
      
  • low rates--If it is generally perceived that the system is fair which means, among other things, that the rates of tax are reasonable, there is less incentive to become involved in fraudulent activities.

  • minimum exemptions--While it is virtually impossible to eliminate all exemptions, tax legislation should be written to include exemptions in the law and to eliminate the discretionary power of Ministers or government officials to grant exemptions.

  • minimum non tariff barriers to foreign trade--The need for numerous approvals for foreign trade licenses and multi-agency authorization to import and export, creates the opportunity and incentive to engage in corrupt practices.

  • effective penalty system--A good penalty system should provide the administrator with the ability to impose administrative penalties for minor offences. This may include fines, for example, for broken seals on vehicles transporting goods in-transit and presentation of declarations with an unacceptable level errors. Serious cases of fraud, including the bribing of revenue officials, would result in more serious actions, including criminal prosecution.

In addition to a clear and simple policy framework, there is also the need to separate the setting of policy from its administration. The policy makers should engage in whatever dialogue is necessary during the design of the policy and the drafting of legislation, including discussions with the trade community. However, once the policy has been established and provided for in the law, there must be a clear separation between the policy makers and the administrators. It must be clear that the law, as interpreted by the administrators, with be applied and that it is not possible to obtain more favorable treatment through the influence of the policy makers. It should not be the responsibility of senior policy makers or Ministers to review and rule on individual cases. Among others, the customs administrations in the United States and the United Kingdom, have clearly established rules supporting this separation of responsibilities.

2. Simple, transparent procedures

It is the responsibility of the customs administrators to put in place simple, easily understood systems and procedures. The reasons for this approach are twofold. Firstly, it reduces the compliance costs for the importers and exporters and, secondly, it reduce: the opportunities for corruption.

The most important principle in the design of simple, straight forward customs procedures Is self-declaration. Importers should have the capability of determining their duty and tax liabilities and, based o~ their understanding of the law, presenting to the customs administration a declaration that includes a calculation of the amount: owing. This must be supported by documentation and information as requested by the administration arid is, of course, subject to verification, either at time of presentation or later through post- release review. To be effective and to reduce the opportunities for corruption, the self-declaration system should be based on the following:

3. Professional customs administrations

The development of professional Customs administrations is important, not only to improve the effectiveness of these administrations1 but, at the same time, to address issues of corruption. Too often, governments are unwilling to provide the authority to the administrations to enforce the laws or to invest the resources necessary to build and provide ongoing support for efficient and effective administration, Experience in developed countries has shown that the best way of ensuring fairness and neutrality in the administration of the tax system is to develop professional administrations with clearly defined responsibilities and accountability for performance, including:


Unexpected benefit

In one country, foreign experts were hired to work with the local customs administration, to set up and operate anti-smuggling teams. Not only has large scale smuggling been detected but, in addition, specific cases of corrupt officers and offices have also been detected.
       Management controls are an essential component of well-run customs administrations. This includes: a clear statement of goals and objectives; well documented operating procedures; supervision of day- to-day activities; and a regular review of the outputs of employees. Management will also consider the results of its internal audits, feedback from importers and exporters, and the views of its employees in evaluating the operations of an office.

Staff rotation

It is a standard procedure in customs administrations in developed countries to assign officers to process passengers and cargo at certain work locations and to provide the work rotation schedule only after the officer has reported for work.
      
  • training--Staff training is crucial to the development of professional customs administrations. In this regard, it is important that a careful analysis of the needs of both the organization and its staff is completed to ensure that the training matches their needs. Too often, new legislation and procedures are introduced with inadequate attention given to the training needs of staff In addition to improving technical skills, training can also serve to build "esprit de corps" and an awareness of the need for responsibility and loyalty to the organization, thereby, promoting integrity.

  • merit-based promotions--An important part of establishing a professional administration is a clearly defined career path and promotion policy that is based on merit. Each individual must feel that there is an opportunity, based on hard work, to advance and that to engage in inappropriate behavior may jeopardize this opportunity (and lead to dismissal in serious cases).

4. Performance standards[2]

Building on a base that includes transparent legislation and clearly articulated, simple procedures, customs administrations should put in place performance standards that enable policy makers, management, and the public to measure how well an administration is performing. This has several advantages. Firstly, it enables the policy makers including Ministers to hold heads of administrations accountable, if agreed standards are not met. Secondly1 it enables management to measure the performance of offices and individuals and to identity potential problems. Thirdly, it makes very clear to the employees that there are expectations and that their performance will be measured against these expectations. Fourthly, the public is aware of what is expected and, therefore, should be willing and encouraged to bring to the attention of management cases where the standards have not been met.

Too often, the only performance standard established for the administrations is the requirement to meet certain revenue targets. This is not enough, particularly if corruption is a problem. The most corrupt revenue administration in the world may, over the short term, be able to meet revenue targets. However, this may do little to ensure that the law is applied in the same manner to all taxpayers and that the collection of expected revenue from new policy initiatives will be achieved. Performance standards, in revenue administrations, should include the following:

5. Code of conduct

It is important that employees and importers and exporters be aware of the conduct that is expected of both parties. By clearly articulating expectations, customs administrators can hold employees accountable for performance and take appropriate action when these standards are not met. Many administrations publish a 'code of conduct" with these expectations. For such a code to be effective; it must also include a description of the disciplinary actions that will be taken if unacceptable behavior is discovered (to be effective, disciplinary actions must be taken on a regular, consistent basis). The political a-~d social context of a particular country is important in establishing the rules for acceptable conduct and the rules guiding participation of tax and customs officials in activities outside their officials responsibilities will vary from country to country. However, the code would normally include the following:

6. Effective internal audit

While it is the overall responsibility of management to monitor performance and to ensure that operational policies are being followed and performance standards are being met, this must be supplemented by effective internal audit. Usually, the internal audit department reports to the head of the administration and is responsible for carrying out regular reviews of all operations in the organization. It is often the internal auditors in customs administrations who are the first to detect instances of corruption when reviewing compliance with procedures.[4] Serious cases of corruption, involving violations of the law, are usually turned over to law enforcement officials for criminal prosecution. internal audit activities normally include the following:

7. Administrative autonomy

In recent years, one strategy that has been followed by a number of countries for improving the effectiveness of customs administration and to address, among other issues, corruption, has been to increase the autonomy of the administration. While there are a number of alternatives to providing greater autonomy, most share the following common features: a degree of financial independence, in the sense that the administrations are able to allocate budget funds as they deem appropriate, administrative independence, meaning that the administrations are provided the authority to formulate their own administrative policies and objectives; and independence from general civil service requirements, meaning that the administrations are responsible for their own recruitment, salary structure, career path and training, and establishing performance standards and codes of conduct.


Notes and References

[1] This paper draws extensively on two previous papers of the staff of the Tax Administration Division: "Integrity in Customs: Action Program for Policy Makers and Customs Administrators", A. Goonnan, presented to the Customs Cooperation Council (CCC), 1993 and "Corruption in Tax Administration", P. Dos Santos, presented to the Inter-American Center of Tax Administrators (CITA), 1995.
[2] For more information on performance standards see "Performance Standards in Tax Administration" a paper presented by Mr. John Crotty to the 1996 CITA meeting.
[3] Post-release reviews are undertaken after the goods have been released from Customs’ control by specialists who typically review valuation, tariff classification, origin, and any other conditions that determine the amounts of duties and taxes payable.
[4] In some administrations, there is also a separate organization (e.g., Internal Affairs) that is responsible for dealing with specific cases of alleged corruption, such as the misappropriation of funds. If management or internal audit uncovers cases of corruption, they are turned over to this organization.
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