OECD – Recommendations on Tightening Controls over Free Trade Zones

The Organisation for Economic Co-operation and Development (OECD) has drawn up recommendations on free trade zones (FTZs) in a bid to stop them being used for illicit trade.

The new guidance – published towards the end of last month – recognises the importance FTZs can play in facilitating globalised trade and stimulating economic growth, but also that they can make life easier for “increasingly sophisticated traffickers dealing in a range of prohibited goods and services including counterfeits.”

One problems with many FTZs is that they are operated by licensed private companies – or sometimes public-private partnerships – which can sometime lead to a disconnect between FTZ internal policies and the laws and regulations laid down by the governments in whose jurisdiction they operate.

The OECD notes also that some with some FTZ the authorities struggle to get physical access to the premises, while obtaining information on the activities of organisation operating within – such as the ownership of goods in transit – can be a challenge.

The result? Some economic operators may “take advantage of inadequate oversight, control and the lack of transparency in FTZ to commit trade fraud, intellectual property rights (IPR) infringement, smuggle contraband, facilitate the proliferation of weapons and launder the proceeds of crime.”

The agency’s recommendations reaffirm the need for law enforcement and other competent authorities to have direct supervision of trade through FTZs, which includes the right to demand access to information related to the production and movement of goods and carry out inspections.

Authorities must also ensure that the organisations operating FTZs are aware of their legal obligations to counter illicit trade.

It has also developed a voluntary Code of Conduct for Clean Free Trade Zone operators, including “strict control of consignments arriving from, or for which there is evidence of having transited through, FTZs that do not implement the code.”

“While FTZs produce economic benefits to their local economies, there is strong evidence that illicit trade (e.g. counterfeits, wildlife and arms) flows through them,” says the OECD.

There is “a positive correlation between the size of FTZs – in terms of employment and numbers of firms – and the value of illicit trade in counterfeits.”

Source: OECD

WCO – Free Zones and the Necessity for Enhanced Customs Involvement

Coega SEZ, South Africa

The expansion of Free Zones has been mainly driven by political decisions closely affiliated with national economic development strategies. In some countries Customs is the primary governmental authority that regulates and governs Free Zones, while in others Free Zones are governed by other authorities, with less involvement from Customs. Depending on the institutional set-up, the scope and degree of Customs control in Free Zones and the economic operations carried out there varies considerably from one Free Zone to another. 

Existing literature reveals that Free Zones attract not only legitimate business but also illicit trade or other illicit activities that take advantage of the regulatory exemptions of Free Zones. 

Numerous papers have outlined the risks associated with Free Zones, along with economic benefits. Most of them deal with the legality of Free Zones policies, particularly in relation to export subsidies as governed by the WTO Agreement. Several other papers have dealt with illicit activities that have been perpetrated by exploiting characteristics of Free Zones. Such illicit activities include money laundering, tax-evasion and trade in counterfeit goods or other illicit goods. 

The WCO research paper deals with Customs-related aspects of Free Zones, considering both the associated benefits and risks. The risks primarily concern illicit trade that exploits key aspects of Free Zones. 

Literature that focuses on risks associated with Free Zones, particularly illicit trade or other illicit activities, have several things in common. They tend to highlight the fact that supervision over cargoes/companies in Free Zones is somewhat relaxed in comparison with other parts of the national territory. The following factors have been pointed out or quoted, although details are rarely provided due to the technical nature of the topic. 

  • Relaxed controls inside Free Zones 
  • Insufficient Customs’ involvement in the operation of Free Zones 
  • Ease in setting up companies inside Free Zones 
  • Insufficient integration of Information Technology(IT) systems by governmental agencies inside Free Zones 

The WCO research paper’s key observations fall in line with those outlined above. It describes the low-level involvement of Customs in monitoring cargo movement and companies’ activities inside Free Zones. This includes Customs’ low-level involvement at the establishment phase of Free Zones, at the approving companies permitted to operate in Free Zones pahse, and during the day-to-day monitoring of cargoes in Free Zones. Limited Customs’ authority inside Free Zones is also mentioned. This paper touches upon relaxed Customs procedures/controls related to Free Zones and observes that they stem from Customs’ limited involvement and limited authority inside Free Zones. These limitations, combined with insufficient integration and utilization of IT, result in a lack of the requisite data concerning cargoes inside Free Zones, and render Customs’ risk-management-based controls – conducted for the purpose of preserving security and compliance without hindering legitimate cargo flows – virtually useless. 

The research paper considers the concept of ‘extraterritoriality’ concerning Free Zones, stemming from a misinterpretation of the definition of Free Zones contained in the WCO Revised Kyoto Convention (RKC), to be behind the aforementioned limited involvement by and limited authority of Customs. The definition within Annex D, Chapter 2 of the RKC does not state that Free Zones are geographically outside the Customs territory. The definition means that the Free Zone itself falls within the Customs territory. ‘Goods’ located in Free Zones are considered as being outside the Customs territory for duty/tax purposes only. 

WCO Research Paper No. 47 – ‘Extraterritoriality’ of Free Zones: The Necessity for Enhanced Customs Involvement

Source: WCO, Kenji Omi, September, 2019

WCO News – June 2019

Britain – a Free Trade Zone?

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Forget increasing the number of Free Trade Zones at and around UK ports, real thought should be given to whether Britain could become a nationwide FTZ, a panel discussion at Multimodal heard today.

The discussion, organised by the Chartered Institute of Logistics and Transport, weighed the advantages and disadvantages of setting up more FTZs as Britain’s starts its exit journey from the European Union.

While Geoff Lippitt, business development director at PD Ports, said that there was no “desperation for the traditional type of FTZ”, he conceded that as UK ports enter a new post-EU member era, any method that could improve the competitiveness of the nation’s exports should be considered.

Tony Shally, managing director of Espace Europe, added that FTZs would give the UK a great opportunity to bring manufacturing back to the country.

Bibby International Logistics’ managing director Neil Gould went a step further, calling for the creation of a ‘UK FTZ’, to facilitate a joined up environment in which it is easier to move trade. “We need to think how we work together as an industry and how we join everything up to make the UK more competitive,” he said.

However, Barbara Buczek, director of corporate development at Port of Dover, sounded a word of caution, warning that FTZs could actually be detrimental for ro-ros, an important cargo mode for the south UK port. “It’s a great concept, but we also have to be mindful of the guys on the other side who we have to ‘play’ with,” she said, adding that she is “a bit sceptical” about how an FTZ plan could pan out. Originally published by Port strategy.com