ANNEX
ATTACHMENT
Recommendation on Countering Illicit Trade: Enhancing Transparency in Free Trade Zones
1.
This document presents a draft Recommendation on Countering Illicit Trade: Enhancing Transparency in Free Trade Zones (hereafter the ‘draft Recommendation’), as reproduced in Annex, developed through the Task Force on Countering Illicit Trade ( 1 ) (hereafter the ‘TF-CIT’), a subsidiary body of the High Level Risk Forum (hereafter the ‘HLRF’) of the OECD Public Governance Committee (hereafter the ‘PGC’). It is designed to assist governments and policymakers to reduce and deter illicit trade conducted through and inside Free Trade Zones (FTZ).
2.
The OECD has developed extensive research on illicit trade in the form of thematic studies and cross country data comparisons to further the understanding and mapping of illicit markets. Its findings provide an evidence base to inform risk management policies that cut across different sectors.
3.
As foreseen in the PGC Programme of Work and Budget 2017-2018 [GOV/PGC(2016)9/FINAL], the OECD in collaboration with the European Union Intellectual Property Office (EUIPO), conducted work analysing trade routes for illicit trade in counterfeits across borders, and different types of illicit goods. The analysis has identified a number of policy gaps, and Free Trade Zones is one of them, where there is scope to strengthen oversight and enhance risk informed law enforcement practices. The 2017 Ministerial Council Statement welcomed further work of the OECD Task Force on Countering Illicit Trade, and recognised the need for international cooperation and partnerships to fight international corruption and illicit trade ( 2 ) .
Rationale for developing the draft Recommendation
4.
In the past decades FTZ have been established at a record rate to attract new business and foreign investment. The aim is to facilitate trade and economic growth by eliminating tariffs, quotas and other taxes and minimizing bureaucratic requirements including certain customs procedures and disclosure requirements. The scope and nature of FTZ vary across countries, depending on the regime and type of activities allowed to take place inside, and can be described under a variety of names such as Free Zones, Enterprise Zones, Export Processing Zones, Special Economic Zones, Foreign Trade Zones, etc. As a result of FTZ proliferation in the dynamic context of globalisation, they have come to play a central role in business for many countries and leading manufacturers.
5.
These developments, however, have outpaced the adoption of standards and regulations governing effective oversight of the activities in FTZ in some countries. As a result, criminal networks have found ways to abuse the supervisory gaps in some FTZ to smuggle or divert illicit products to the domestic market, set up production facilities for counterfeit and contraband goods, transit illicit goods and facilitate the conduct of illicit services. In some countries FTZ are treated for all purposes as outside the nation’s customs territory with the result that goods enter or exit these areas with minimal customs controls. Although the conditions for establishment of FTZ are regulated, the extent of customs controls or interventions is often insufficient or absent. Even where legislation specifically provides jurisdiction for customs authorities to exercise controls in FTZ, enforcement can be weak.
6.
Many FTZ produce economic benefits to their local economies, but there is strong evidence to show that illicit trade flows through them e.g. in counterfeits, wildlife, arms, etc. OECD analysis finds a positive correlation between the size of FTZ, in terms of employment and firms established therein, and the value of illicit trade in counterfeits. Some FTZ are found to be key trans-shipment points for illicit goods that have been repackaged or relabelled to conceal their point of origin and to penetrate the legitimate supply chain.
7.
At the 2017 meeting of the Council at Ministerial level, Ministers ‘recognised the need for international cooperation and partnerships to fight international corruption and illicit trade, including by strengthening the implementation of existing standards’ and ‘welcomed further OECD work on illicit trade, including through the Task Force on Countering Illicit Trade’.
8.
To address these challenges and respond to the Ministers’ call, the TF-CIT has worked on a draft OECD Council Recommendation proposing measures to enhance the transparency of FTZ in order to reduce their misuse and make them less attractive to the criminal organisations that currently take advantage of them.
9.
The draft Recommendation is grounded on six years of analysis and expert consultation at the OECD, notably through:
10.
Meetings of the TF-CIT on the law enforcement challenges that FTZ present across different illicit markets, and two joint workshops with different intergovernmental organisations. The first workshop was organized with the World Customs Organisation (WCO) in Brussels in November 2016, and the second with the EUIPO in Alicante in September 2017;
11.
An OECD report on ‘Governance Frameworks to Counter Illicit Trade’ that, inter alia, reflects the broad lines of these discussions ( 3 ) as well as a joint OECD and EUIPO report on ‘Trade in Counterfeit Goods and Free Trade Zones’ published in March 2018 ( 4 ) , which established statistical correlations between the size of a FTZ (in terms of firms established therein, employees, and contribution to overall export value) and the value of fake goods arriving from a particular jurisdiction.
12.
The analysis identifies key challenges that make FTZ susceptible to illicit trade:
•
The FTZ operating environment may lack adequate oversight by law enforcement authorities due to the frequent misconception that companies established inside are effectively operating outside the jurisdiction of a national territory. This leads to the mistaken view that national law enforcement and customs lack authority to access the physical premises and information on the economic operators conducting business inside.
•
Even in economies where the correct understanding of the authority of local customs and other law enforcement to access a FTZ is in place, incentive is low to monitor its activities and transhipments, unless there is sufficient leakage to the domestic market.
13.
Bulk cash is easily introduced into FTZ by declaring that it is for retail transactions inside, but there is no official verification process to confirm its end use for lawful business. Furthermore, the lack of integration of electronic cargo tracking systems with competent authorities hinders timely risk analysis.
14.
Even though anecdotal evidence of the misuse of FTZ to conduct illicit trade has put some of them in the international spotlight, high-level awareness of the risks from FTZ remains relatively low.
15.
The expert meetings and reflections, together with recent OECD publications on free trade zones and previous OECD reports ( 5 ) , substantiate the conclusion that a lack of monitoring, oversight and transparency about activities conducted in numerous FTZ enables the production, movement, storage and smuggling of illicit goods. The weight of these findings supported the call by Ministers at the 2017 MCM for the OECD to mobilise coordinated international action with the aim to increase transparency in FTZ and thereby reduce their utility as conduits for illicit trade.
Process for developing the draft Recommendation
16.
At its December 2017 meeting the HLRF agreed that the Task Force should develop a draft set of guidance on countering illicit trade in furtherance of the OECD mission to set global standards and level the playing field for globalisation. The aim of the proposed measures is to reinforce the capacity of law enforcement to take effective actions and to reduce the attractiveness of FTZ to criminal entrepreneurs.
17.
A first draft guidance on countering illicit trade: enhancing transparency in free trade zones was discussed and commented on at the March 2018 meeting of the TF-CIT [GOV/PGC/HLRF/TFCIT(2018)1], with written inputs from consultations with the Financial Action Task Force, WCO, and the World Trade Organisation secretariats.
18.
The PGC was informed of the process at its 57th meeting on 12 April 2018 and was invited to comment on policy options to strengthen governance frameworks to counter illicit trade including an inclusive consultation process. The PGC also agreed to open up the draft guidance to public consultation [GOV/PGC/A(2018)1].
19.
Following the incorporation of further comments on the draft guidance from the HLRF and TFCIT, the online public consultation was launched from 8 July 2018 and ran until 3 September 2018. The consultation was open to the participation of all stakeholders and input was received from, among others, OECD Members and non-Members, FTZ operators, their associations, intermediaries (including shippers, freight forwarders and couriers) and the industries that are established in FTZ or use them in course of their supply chains. Over 200 individual stakeholders participated in the public consultation with nearly 100 pages of written comments received.
20.
In addition, the draft guidance was presented for comments to the Working Party of the Trade Committee on 18 June 2018 and internal consultations were held with the secretariat of the Economics Policy Committee, the Trade Committee, the Working Group on Bribery in International Business Transactions, and the Global Forum on Transparency and Exchange of Information (GFTEI). Further, the secretariat of the Financial Action Task Force on Money Laundering (FATF) was also consulted. Valuable input was received and helped strengthen the consistency and coherence of the draft guidance with already existing instruments.
21.
Following the incorporation of all relevant and important comments from the public consultation and consultation of other OECD bodies and secretariat, the revised draft was circulated to the TF-CIT (and HLRF) again as a draft Recommendation. At this point certain delegations raised several questions including how best to monitor whether FTZ are in compliance with the Code of Conduct for Clean Free Trade Zones. These questions were addressed and resulted in the draft text in the Annex, which does not contain a specific provision on monitoring compliance, but includes a statement of the intention to develop a clear means to monitor compliance within one year after adoption of the Recommendation.
22.
The revised draft Recommendation is hereby presented to the TF-CIT for approval and transmission to the HLRF, after which it will be transmitted to the PGC for approval and ultimately transmission to Council, via the Executive Committee for adoption.
Aim and scope of the draft Recommendation
23.
The draft Recommendation is designed to ensure transparency in FTZs and is framed as part of the broader effort to counter illicit trade. Illicit trade has broad adverse economic, social, environmental and even political impacts – it is holistically destructive to sustainable development. It undermines good governance, erodes trust in government and the rule of law, and potentially creates threats to political stability as its economic actors deflect unwanted attention to protect their illegal market share.
24.
The broader aim of the draft Recommendation is to establish over time clear expectations with respect to effective policies to counter illicit trade. The goal of shared standards for globalisation is to ensure its benefits can be fully shared, while the harms are reduced to the extent feasible. This requires countries to further collaborate and invest in the development of suitable institutional capacities ( 6 ) .
25.
The draft Recommendation calls on Members and non-Members having adhered to it (the Adherents) to encourage FTZ to adopt a voluntary Code of Conduct for Clean Free Trade Zones (set out in the Appendix to the draft Recommendation), with the understanding that compliance with its provisions will be assessed and monitored by a mechanism (diagnostic tool) to be established within one year after the adoption of the draft Recommendation. The goal is to ensure the impact of the draft Recommendation and promote transparency in an effective manner, so that FTZ conduct oversight of economic operators established in a zone and cooperate with competent public authorities. The FTZ should foster the availability of information useful to investigations, and bring accountability and a level playing field with the positive net result of reducing illicit trade.
26.
The draft Recommendation proposes a dual approach that addresses dimensions that are relevant for all stakeholders of good governance in FTZ including customs authorities and as needed the broader law enforcement community (which may include environmental crime authorities, tax authorities and others), FTZ, economic operators within a zone, and civil society.
27.
The objective of the draft Recommendation is to support Adherents and provide useful guidance to address the challenges and identify good practices related to the reduction of illicit trade. A comprehensive approach to reducing illicit trade in FTZ requires investment in actions on the part of Adherents, as well as in cooperation to increase the monitoring and control of FTZ where they are being abused to conduct illicit trade. For these reasons the draft Recommendation addresses key needs identified specifically by OECD research, including:
•
A coordinated international effort between national legislative and enforcement authorities to ensure law enforcement and customs officials are expressly empowered to conduct, in accordance with domestic law, effective on-site investigations, examinations or inspections without prior notice or judicial authorization, at any time, and at any place within any FTZ to facilitate administration of applicable law, regulation or policy instruction.
•
International cooperation to set incentives for local authorities to exercise more vigilance and control over FTZ as the negative externalities are not sufficient in their domestic markets to motivate actions that mitigate the risks of illicit trade.
•
The generation of political will to advance a solution to the challenges.
Monitoring the implementation, dissemination and non-Member adherence
28.
The draft Recommendation instructs the Public Governance Committee to:
•
Use the Task Force on Countering Illicit Trade as a forum for the exchange of information and the conduct of voluntary peer reviews with respect to the implementation of this Recommendation. This may take the form, for example, of stakeholder engagement to raise awareness of the risk of illicit trade in specific FTZ, to discuss compliance with the Code of Conduct of Clean Free Trade Zones and to compare experiences and examine practice in the reduction and deterrence of illicit trade risks.
•
Establish a mechanism (diagnostic tool) for the assessment of the performance and the compliance of FTZ with the Code of Conduct for Clean Free Trade Zones . The mechanism would be established through a multi-stakeholder process led by the TF-CIT under the aegis of the HLRF and PGC within one year from the adoption of the Recommendation.
•
Develop a toolkit to support Adherents in the implementation of the Recommendation, including promotion and encouraging compliance of FTZ with the Code of Conduct for Clean Free Trade Zones within one year from the adoption of the Recommendation: through a multi-stakeholder process lead by the TF-CIT, under the aegis of the HLRF and PGC, a toolkit would be developed to support Adherents and FTZ in its practical implementation, including with respect to compliance with the Code of Conduct of Clean Free Trade Zones. This toolkit would include the development of a FTZ risk assessment model for companies to gauge the integrity and adequacy of good governance in various FTZ against a range of benchmarks. It would also include a repository of good practices illustrated with concrete examples, and platforms for multi-stakeholder cooperation may be developed incrementally to close the policy, governance and enforcement gaps.
•
Monitor the implementation of this Recommendation and report thereon to the Council no later than five years following its adoption and at least every ten years thereafter : this report will assess the relevance and impact of the draft Recommendation with a view to ensure that it remains up-to-date, identifying any necessity for revision as appropriate. The report will build on the information concerning good practices gathered in the development of the toolkit, discussions in the PGC and its relevant subsidiary bodies on the implementation of the draft Recommendation, and exchanges through multi-stakeholder platforms of co-operation formed to feed into the work of the PGC and its subsidiary bodies on this matter.
29.
The draft Recommendation invites the Secretary-General and Adherents to disseminate it. Once adopted, the draft Recommendation will be available on the online Compendium of OECD Legal Instruments. A booklet containing the text of the draft Recommendation, together with relevant background information will be accessible in PDF format to facilitate dissemination. The Secretariat will share the draft Recommendation through meetings of relevant ministries, parliamentary groups, industry associations, professional bodies and networks of relevant academics and experts.
30.
The draft Recommendation will be open to non-Member adherence. Such adherence would represent a political commitment by the Adherents to the principles set out in the draft Recommendation. Having interested non-Members adhere to the draft Recommendation would send a message that they can play a pro-active part in the effort to reduce illicit trade and help further level the playing field globally. Any non-Member Adherents would be included on the activities to support and monitor its implementation.
( 1 ) The Task Force on Countering Illicit Trade maps and measures the economic impacts of transboundary trafficking in such sectors as counterfeit goods, wildlife and persons.
( 2 ) 2017 Ministerial Council Statement.
( 3 ) Governance Frameworks to Counter Illicit Trade (OECD, 2018).
( 4 )
Trade in Counterfeit Goods and Free Trade Zones: Evidence from recent trends (OECD-EUIPO,2018).
( 5 )
Why Do Countries Export Fakes? The Role of Governance Frameworks, Enforcement and Socio-economic Factors (OECD-EUIPO, 2018); Illicit Trade: Converging Criminal Networks (OECD, 2016).
( 6 )
Governance Frameworks to Counter Illicit Trade (OECD, 2018).
