Dollars - Illicit Trade

Report Raises Concerns On Governments’ Will To Fight Illicit Trade

Illicit Trade: Quantifying The Problem Size

The cost of illicit trade to the global economy is massive, although it’s hard to quantify it precisely. A report of the World Economic Forum from 2015 estimated the cost of counterfeiting and piracy alone at $1.77 trillion in 2015, which is nearly 10% of the global trade in merchandise. A huge amount of money, no doubt.

If you just imagine the amount of direct damage to societies: the taxes and duties that would have been levied on $1.77 trillion could be used to develop physical and societal infrastructures. Thus every single taxpayer suffers from this illicit trade.

Illicit Trade: Measuring The Enabling Environment

Today I wish to highlight an initiative of The Economist Intelligence Unit (http://www.eiu.com/home.aspx) and TRACIT, the Transnational Alliance To Combat Illicit Trade (www.tracit.org). Their recent Global Illicit Trade Environment Index Report (June 2018) aims to “measure of the extent to which economies enable (or inhibit) illicit trade through their policies and initiatives to combat illicit trade”. The report covers 84 countries from various geographies.

The ranking is a breakdown to four categories/aspects of preventing illicit trade:

  • Government Policy: it measures the availability of policy and legal approaches for monitoring and preventing illicit trade (weight: 35%)
  • Supply and Demand: a measure of the domestic environment that encourages or discourages the supply of and demand for illicit goods. (weight: 20%)
  • Trade and Transparency: transparency as regards illicit trade and the degree to which economies exercise governance over their free-trade zones (FTZs) and transhipments (weight: 20%)
  • Customs Environment: measuring how effectively an economy’s customs service manages its dual mandate to facilitate licit trade while also preventing illicit trade (weight: 25%)

Illicit Trade Benchmark: Key Insights

A few interesting insights:

  1. With a score of 85.6 (out of 100), Finland ranks first in the overall index
  2. The top ten ranking countries are Finland, United Kingdom, United States, New Zealand, Australia, Sweden, Austria, Netherlands, Denmark and Germany (score 78.9, closing the top-10 list).
  3. The ten countries scoring lowest are a group of developing economies from all regions of the globe. Libya ranks worst among the 84 economies (score 8.6), preceded by Iraq (score 14.4) in 83rd place. Myanmar, Laos, Venezuela have score in the twenties. Cambodia, Kyrgyzstan, Belize, Ukraine and Trinidad and Tobago have scores in the thirties.
  4. Regionally, Europe (34 economies in the index) earns the highest the average score (68.0). The Asia-Pacific (21 economies) comes second at 56.0 and the Americas (19 economies), including the US and Canada, is in third at 54.0. The Middle East and Africa (10 economies) is last among the regions, mainly due to low scores on the “supply and demand” and the “transparency and trade” indicators.
  5. The “Customs environment” aspect scores the highest average score (69.0) across all 84 economies. It measures how effectively an economy’s customs service manages its dual mandate to facilitate licit trade while also preventing illicit trade. The lowest average score (50.0) is in the “supply and demand” category, which measures the domestic environment that encourages or discourages the supply of and demand for illicit goods.

The Report Raises Serious Doubts About The Fight Against Illicit Trade

The authors of the report make a discouraging statement about the pro-active approach of nations in dealing with illicit trade. “Where economies aren’t under-resourced in customs or law enforcement, they may otherwise be indifferent or actively neglect illicit practices in order to continue reaping the economic benefits of being a global financial centre (like the UK) or a regional logistics hub (like Singapore, Dubai and Panama) or one of the world’s factories (like China and Vietnam) or a main source of narcotics (like Colombia). Or they may just be corrupt; corruption is far more pervasive than people appreciate and it is by no means limited to the developing world, as investigations in the US and elsewhere have recently shown”.

Insights about Specific Economies

Fighting Illicit Trade – Luxembourg

Take for example Luxembourg. The country rates overall 13th, yet it ranks very strongly (8th) on the category “supply and demand” (i.e. there is no strong market for illicit goods in Luxembourg) but only 19th on “Government policy”.

Fighting Illicit Trade – Russia

A similar case, though much worse, is Russia. The country rates 62nd among the 84 economies, thus offering a fertile environment for illicit trade. Similarly to Luxembourg, Russia scores substantially better on “supply and demand” (42nd) than on “Government policy” (76th).

Fighting Illicit Trade – Singapore

Another interesting country is Singapore, serving as a logistics hub between East and West. Singapore ranks 24th overall, yet with very interesting scores on the various categories. The country scores 2nd in “supply and demand”, i.e. the market for illicit goods is very small. Yet the country scores only 56th on “Customs environment” and 57th on “transparency and trade”. Especially the low score on “Customs environment” is interesting, given that Singapore typically scores high on Customs in the Logistics Performance Index (LPI) of the World Bank. Singapore’s low score is the result of the country’s score 0 (zero) on two indicators:

  1. Customs recordals system: a legal measure that allows IP owners to register their IP with the local customs agency and empowers that agency to interdict shipments potentially containing IP-infringing goods without a specific request from the IP owner
  2. Percentage of shipments physically inspected (the source of this indicator is the World Bank LPI).

Fighting Illicit Trade – China

Given its dominant role in global trade, high performance of China in fighting illicit trade is of global importance. Yet China’s overall ranking (44th of 84) shows that fighting illicit trade is not a top priority in China. Had it not been for its good position on “transparency and trade” (China scores #1 on FTZ Governance), China’s ranking would have been even lower. The country ranks 58th (!) on Government policy.

Fighting Illicit Trade – Estonia

Estonia is another interesting example. The country enjoys the reputation of an innovative country, and leading in digital services. It’s not surprising therefore that the country ranks well (8th) on the “Customs environment” category. Yet its overall ranking is only 25th, as Estonia ranks 29th, 27th and 30th on the other categories. To conclude, there is room for improvement on other aspects of fighting illicit trade (other than Customs).

Awareness For Illicit Trade

Reports such as these are important for raising the public’s awareness for the challenges around illicit trade. The report shows clearly which countries make a bigger effort than others to fight illicit trade. It also shows in which area extra effort is required. In some countries Customs operations need to be strengthened; in other countries Government policies are lacking. On a global scale, the average overall score of 59.6 is not encouraging.

Takeaways – Actions

  • Law enforcement agencies: Extra analytic effort is required for assessing risks in shipments with countries that have a low ranking. One cannot rely on checks done at the country of export.
  • Importers around the world: Strict Due Diligence is recommended before engaging with a company in a high-risk region, or a company whose supply chain involves such as region
  • Manufacturers: You risk that your products will be labelled as “high risk” if they are manufactured in a high-risk area or by sub-contractors operating in high-risk areas
  • Logistics Service Providers: LSPs may incur reputational damage if they engage in handling illicit cargo, also unknowingly. It is recommended to establish a Due Diligence process for your clients, especially in high-risk countries.

 

Interested in further developing these ideas? Get in touch.

 

Suggested Reading:

  1. Customs Transit Fraud – Industry Update
  2. Big Data For Customs At The Borders: Start Small, Think Big!
  3. Dictionnaire du renseignement, by Jérôme POIROT and Hugues MOUTOUH (French)

 

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Ziv Baida

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