What are typical negative impacts caused by violations/non-compliance with import/export fiscal rules, restrictions and prohibitions?

In the grand scheme of things, import/export (indirect) tax regulations, as well as rules on restrictions and prohibitions exist – and, are enforced by customs agencies – to fulfill governmental policy objectives. In this blog entry we explore what are the negative socio-economic impacts when these regulations and rules are being violated, in the context of commonly trafficked goods.

In the two research papers by our team from year 2014 (papers listed at the end of this blog), we identified following twelve types of common illicit flows:

• Duty, VAT and excise tax fraud in general;
• Fraud in cigarette border taxes;
• Fraud in fuel border taxes;
• Trafficking in quota-restricted commodities;
• Trafficking in cocaine and heroin;
• Trafficking in counterfeit products;
• Trafficking in ozone depleting substances;
• Trafficking in firearms;
• Trafficking in stolen cultural products;
• Trafficking in wildlife;
• Trafficking in timber; and
• Trafficking in human beings.

When going through a vast amount of practitioner (e.g. UNODC, UNEP, UNDCP, UNICRI, WCO, OECD, European Parliament, Frontex, OLAF, EUROPOL and INTERPOL) as well as academic literature, we learned that the negative impacts for the society and the economy, both at the source and at the destination countries / regions, fall into six main categories. Below we explain briefly each category, with some relevant examples.

Increasing market place distortions and/or unfair competition (9 out of 12 flows): This is the most common negative impact in terms of the number of illicit flow types caused by trafficking activities. Fraudulent acts with indirect border taxes, violations in quota restrictions and distribution of counterfeit products are typical examples of providing unfair competitive advantage e.g. in the form of “import cost savings” to those actors who are not complying with the rules.

Increasing health care and social security costs (8 flows): This is the second most common negative impact linked to various smuggling activities. Trafficking in cocaine and heroin, trafficking in firearms and trafficking in human beings are obvious examples of activities which ultimately increase the burden for the health care and social security system at the destination countries.

Losses in tax revenues regarding indirect border taxes (6 flows): Next to the general duty, VAT and excise tax fraud, as well as cigarette and fuel border tax evasion, based on our literature analysis there are three other flows which can be highlighted from the tax loss perspective: trafficking in counterfeit products, in quota-restricted commodities and in timber.

Increasing environmental damages (6 flows): The most obvious illicit flows leading to direct environmental damages are the following three: trafficking in ozone depleting substances, in endangered wildlife and in timber. The first one applies mainly in the destination countries, while the two latter ones are typical problems at the source countries. Trafficking in cocaine and heroin is another example where environmental damages occur at the source countries.

Increasing human suffering (6 flows): This negative impact is somewhat linked to an earlier one on increasing health care and social security costs. Next to trafficking in narcotics, firearms and in human beings, counterfeit products including sub-standard pharmaceuticals, food items and drinks can in the worst cases cause heavy human suffering and even death.

Losses in cultural heritage (1 flow): This last negative impact is caused by only one flow, i.e. trafficking in stolen cultural products, which next to sorrow and economic loss to private owners can lead to damage and destruction through looting and pillaging, also threatening future archaeological research activities.

Having illustrated and discussed above the main socio-economic negative impacts of commonly trafficked goods, one more question remains: the “so-what?”. Besides maybe being “nice-to-know” for practitioners and academics alike, would there be any specific stakeholder group in global supply chain security who could benefit from this type of analytics, in order to do a “better job”? Could for example governmental policy makers and regulators get some ideas to support their future work on related policies and regulations? Or, would customs, police and other enforcement agencies gain deeper understanding on the relevance of certain regulations they are enforcing? Is there any specific group among supply chain companies or service providers who can exploit such information? This is something we would like to hear from you, blog readers – please feel free to comment directly on the blog page, or send us an email to   cbra@cross-border.org

PS. Further readings on the blog topic:

Hintsa, J., Mohanty, S., Rudzitis, N., Fossen, C. and Heijmann, F. (2014), “The role and value of customs administrations in minimization of socio-economic negative impacts related to illicit import flows in freight logistics systems- three preliminary cases in Europe – FP7-CORE”, Proceedings of the 9^th WCO PICARD Conference, September 17-19, 2014, Puebla.

Hintsa, J. and Mohanty, S. (2014), “A literature-based qualitative framework for assessment of socio-economic negative impacts of common illicit cross-border freight logistics flows”, Proceedings of the Hamburg International Conference of Logistics(HICL), September 18-19, 2014, Hamburg.

(please send an email to cbra@cross-border.org to get a copy of these papers)