1. 1st December 2017
Elizabeth Allen

2. WHAT ARE FREE TRADE ZONES?
Free Trade Zones are special economic zones designed to encourage economic development.
Benefits usually include:
Exemption from duty and taxes;
Simplified administrative procedures; and
Duty free imports of raw materials, machinery, parts and equipment.

3. BUT
Lack of control by Customs in FTZ has resulted in exploitation of their use by international criminal organizations. Many are now used for the production, storage, sale, transit and transhipment of counterfeit and contraband products through:
Illegal transhipment
Manufacturing base with no supply chain controls
Leakage of non-duty paid products

4. ILLEGAL TRANSHIPMENT
Disguising the origin and nature of goods by mis-declaration
Declaring goods in transit that are placed in warehouses to obscure their onward movement and manipulating documents.
For small, often uncontainerised shipments, goods may be repacked into new untraceable containers that are falsely re-manifested as containing other products not subject to excise duties and leave the FTZ by road.

5. MANUFACTURING WITH NO SUPPLY CHAIN CONTROLS
Irresponsible manufacturers produce cheap goods legally within the FTZ but apply no supply chain controls selling those goods to smugglers for global illegal distribution.
Goods such as cigarettes may be entered correctly for export but are then entered under a different classification at import at their final destination.
Some manufacturers also produce counterfeit products

6. LEAKAGE OF NON DUTY-PAID PRODUCTS
For excisable goods such as tobacco products and alcohol, smugglers take advantage of weak customs enforcement in and around FTZs to move the products illegally from FTZs into the surrounding domestic market thereby:
evading taxes and duties; and
competing unfairly with locally manufactured and legitimately imported products.

7. WHAT POWERS SHOULD CUSTOMS HAVE OVER FTZ?
FTZs should be subject to the full range of intellectual property protection and customs laws and to appropriate international agreements.
Customs should have power to:
Inspect and seize illegal shipments
Confiscate and destroy illegal materials.
Customs should:
authorize/approve all businesses allowed to operate in FTZs;
set out conditions of approval;
set up a control mechanism.

8. OTHER REQUIREMENTS
New businesses should be subject to due diligence requirements in order to get approval to operate in a FTZ.
National legislation should specify:
goods excluded from the benefits of the FTZ e.g. counterfeit/pirated or smuggled goods; and that
the FTZ may not be used for operations during which certificates of origin are removed.

9. ANTI-COUNTERFEITING CONTROLS
Customs should have power to:
Seize suspected counterfeit goods, along with any related materials used
Suspend the release of goods suspected of infringing IPR, including goods in transit/transhipment, in a FTZ or under import or export procedures.
Destroy goods suspected of infringing IPR upon request by right holders so long as the holder of the shipment does not oppose such destruction.

10. ANTI-COUNTERFEITING CONTROLS continued
Require that infringers be primarily held liable for storage and destruction costs of infringing goods.
Seek criminal penalties for IP theft that reflect the magnitude of the crime with higher penalties for goods that have adverse health and safety implications.
Seize assets of those deriving a benefit from involvement in the production, storage, movement and distribution of infringing goods.

11. ANTI-COUNTERFEITING CONTROLS continued
Proceeds of crime legislation should apply to all IP violations and provide for (a) effective implementation of asset tracing, (b) a non-conviction based confiscation regime and © reversal of the burden of proof.
Customs should be empowered to take enforcement action when they become aware of specific illegal activiteis within a FTZ whether or not their country is the declared destination of the goods.

12. CONTROL TOOLS
Legislation, procedures and systems should be aligned to IP legislation and cover goods in transit.
Anti-money laundering legislation, including detailed requirements for the reporting of suspicious transactions.
Ensure data is secure and accessible only by authorised officials with auditable records of access and any changes made.
Intelligence and risk-based compliance controls supported by systematic sample checks to focus enforcement of the riskiest operators/transactions.

13. CONTROL TOOLS continued
Develop a shared electronic filing system with FTZ operators to enable them to file all declarations of goods entering and leaving the FTZ and of operations carried out on the goods whilst in the FTZ .
Set up a specialist task force to build expertise in tackling illegal trade and conduct specific operations.

14. CONTROL TOOLS continued
Raise awareness among FTZ operators, shipping agents, transporter and FTZ merchants and employees by providing education and training.
Develop collaborative working with the Police and with Customs officials from source and destination countries.
Develop user-friendly quick systems to exchange data with authorized officials in other countries.

15. VOLUNTARY CODE OF CONDUCT
The World Free Zones Association is promoting a Voluntary Free Zones Certification programme based on international standards and best practices compatible with the WCO SAFE Framework of Standards for Authorised Economic Operators.
OECD Task Force on Tackling Illicit Trade is developing a Voluntary Code of Conduct for:
Operators of FTZ
Businesses in FTZ
The intention is to help Customs to identify compliant businesses and FTZ operators and enable resources to be focused on the remainder.

16. CONTENT OF VOLUNTARY CODE OF CONDUCT
Still work in progress but might include:
Documentation
Compliance behaviour
Supply Chain Controls
An internal code of conduct/ethics
Training provided to staff in Customs requirements
Commitment to contact a Customs Liaison Point with information of any suspect operations/persons.

17. MORE INFORMATION WCO website for Revised Kyoto Convention Annex D
Interpol Legal Handbook on Countering Illicit Trade in Tobacco Products

18. MORE INFORMATION
OECD Task Force on Charting Illicit Trade – Illicit Trade: Converging Criminal Networks (December 2015)
BASCAP publication on Role of Intermediaries