Customs Transit Fraud – Industry Update

Conference on Customs Transit Fraud

Brussels hosted today a unique industry conference on fighting fraud in the Customs transit regime in the EU. The conference was organized by the Robert Schuman Foundation in collaboration with ADIT (France).

Why was the conference unique?

People from across the world watched the conference through online streaming in real time
The conference brought together a very interesting mix of Government officials (from the EU as well as Member States) and the private sector
Content was highly (!) informative, relevant and insightful

And also because of the beautiful garden of the hosting hotel. Trees and birds gave us the feeling that we were in the countryside, rather than in a busy city.

The Problem of Customs Transit Fraud

What is Customs Transit?

For readers that are not familiar with Customs transit, I’ll explain shortly. Transit is a Customs regime where goods are shipped from location A to location B without paying import taxes and duties. Subsequently, in location B the goods are placed under the customs procedures for which they are destined. This is handy e.g.:

When goods cross a country en route to another country. Imagine a shipment from Switzerland to Denmark, via Germany.
Goods that enter the EU through one country, but are destined for importation at another country. Think for example about the following scenario:
- Goods coming from China by vessel;
- They are being offloaded at the port of Rotterdam in The Netherlands;
- The goods continue by truck to Germany where they are finally imported.

There are several types of transit, but that goes beyond the scope of the current blog. Here is a longer explanation: https://ec.europa.eu/taxation_customs/business/customs-procedures/what-is-customs-transit_en

How Big A Problem Is Fraud?

The risk of fraud is very imminent. Imagine that the goods traveling from Rotterdam to Germany never arrive at their destination. Instead, it ends up in the black market. This would result in loss of revenue (taxes and duties). And hence the transit regime has been an interesting playground for criminals. I am not aware of official numbers indicating the size of transit fraud in the EU. Several estimates that I heard range from a single-digit to a double-digit number of billions (!) of Euros of lost revenue per year. Big Money.

Gained Insights: Data, Digital, Technology, Human Factor And Data Sharing

Conference speakers and visitors shared their experiences.

On Underlying Business Processes:

Fraudsters set up companies, and submit declarations to Customs. For example, they submit EMCS declarations for excise goods. But they send numerous lorries (shipments) with the same (supposedly unique) number, which may only be used once. They expect that inspections will not intercept all these lorries and detect the fraud. Thus one piece of paperwork is prepared officially while numerous shipments are shipped, expecting that most of them go undetected without paying duties.
The carrier, rather than the shipper, is responsible for the financial risks in the transit regime. Namely, it is the carrier’s responsibility to ensure that the end-to-end transport service is provided as agreed, uninterrupted and without deviations from the rules governing the transit regime.
AEOs (a form of “trusted trader” permit, issued by Customs) are being evaluated by Customs prior to receiving their AEO status. Once they obtain the AEO status, there is a need to monitor whether there are substantial changes, e.g. change of ownership. Companies should inform Customs when such cases occur. But they do not always do so. Or they do not always do so on time. Sometimes they have a pragmatic reason to (not) do so, yet it’s still wrong behavior (not respecting the conditions of their permit).
AEOs should know their clients/suppliers abroad. But do they really want this responsibility? They’d rather Customs perform Due Diligence checks because they have limited ability to do such checks. Neither do they want the liability that such responsibility entails. Especially, it’s very hard for them to verify their 2^nd tier, 3^rd tier etc clients/suppliers. At the same time, UK legislation already determines that a company is liable if they do not stop tax fraud of entities that they do business with. The British law (as one of the participants explained to me) is not clear on whether it refers only to direct clients/suppliers, or also to tier 2, tier 3 etc.

On The Nature Of Fraud and Fraudsters:

Organized crime is becoming more imminent. While in the past more often individuals committed fraud, now we see a rise of organized crime activities.
Small consignments, specifically eCommerce parcels, requires more attention from Customs, specifically (but not only) due to IPR (Intellectual Property Rights) violations.

On The Magnitude Of Fraud:

One EU Member State reported that in a given year, 30-35% (!!!) of the T1 declarations that they had processed (T1 is the external transit procedure which covers the movement of non-Union goods, suspending the measures normally applicable to them on import) were fraudulent.
Cigarette smuggling in the EU results in loss of more than 10 billion Euros of (not) collected taxes & duties yearly.
The tax gap in the UK alcohol sector is roughly 1,3 billion GBP per year.

On Technology:

The EU DG/TAXUD has engaged in two pilot projects with Blockchain technology. A project About excise goods is of special interest because it serves as a test case for using the Blockchain technology as the underlying technology for trans-national systems. EMCS (the excise system) is one such system; NCTS (the transit system) is similar. In today’s situation each country has its own EMCS system, and they each need to implement it. The vision behind the pilot is that in the future there can be one Blockchain implementation, where each EU Member State has a node, removing the need for implementation in each Member State.
The road to have this vision realized is still long though. Besides technology challenges one must also consider carefully the data sharing aspect: Member States may need to be willing the share more data than currently in order to implement this Blockchain solution. Are they willing to do so? (some participants doubted)
Implementing a Big Data analytics capability at Customs requires more than technology and the right data. It required a change management program to ensure that Customs employees – who have worked for many years without analytics techniques – learn to work with the new insights, and learn to appreciate them.

On Data:

There was a discussion on whether to have a mandatory requirement for transit declarations to include an HS Code (a numeric code identifying the nature of the goods). Some industry representatives suggested it would entail a big administrative burden. But a software provider who submits transit declarations on behalf of its clients said that they have the HS code, and they remove it from the dataset before sending it to Customs because Customs agencies are unable to receive it. Availability of an HS code facilitates automated risk assessment by Customs, as a representative of Greek Customs argued.
Customs is unable to monitor changes that traders undergo, because there are so many changes every day. For example, in the U.S. every hour 148 new businesses open their doors; 170 directorship (CEO, CFO,…) changes occur; 399 suits, liens or judgments are filed against businesses; and more. This is the core business of companies like Altares Dun & Bradstreet, who offer to Customs the service to monitor companies of interest, and inform Customs about events of interest.
Both targeting (identifying high risk shipments) and de-risking (identifying shipments as low-risk) entail establishing the risk level associated with traders . Company data is a means to this end. Especially when dealing with traders from other countries, Customs benefit from external insights about these traders.

Conclusions

My key conclusions are:

The need for collaboration between Government agencies (across borders) increases, as the sophistication of fraudsters increases.
Governments have lots of data, but not always all the necessary data (at the right time) to stop fraudsters. Especially when dealing with organized crime, analysis using a combination of Government data with other data sources provides highly useful insights.
Insights about the foreign parties involved in trade are instrumental for understanding the risks associated with shipments.
Doing Due Diligence checks on 2^nd tier, 3^rd tier (etc) clients and suppliers becomes more and more important, and the regulator may impose more requirements in this area in the future.

And finally: spending a whole day with experts from the same ecosystem is not just insightful. It’s also fun!