Addressing smuggling and illicit trade

Excerpts from Stefano Betti Address to FICCI Anti-Smuggling Day Conference on February 11, 2022.

Good morning, ladies and gentlemen, and many thanks to FICCI for the opportunity to say a few words on the occasion of the Anti-Smuggling Day. Smuggling is a complex and multifaceted phenomenon. It is a vast subject, and there are many perspectives that could be addressed. So, in the little time available to me, I will just put forward a few key points for your consideration. Those are points that TRACIT - the organization I am representing here - is busy addressing with its governmental partners, international organizations and the business community at large.
 
The term “smuggling” is itself the object of numerous definitions that differ from each other depending on whether they are used in a legal, policy, law enforcement or academic context. There are also variations based on the type of goods under consideration. Despite the differences, however, all existing definitions have a minimum common denominator, which is captured in the idea of smuggling being a set of activities aimed at moving or facilitating the moving of goods across borders in violation of applicable laws.
 
It is important to highlight that smuggling activities generate a wide range of negative impacts on society and the economy. Notably:

• Loss of revenues for governments;
• Loss of regular employment opportunities for individuals and communities;
• Loss of income - and incentives to invest - for legitimate businesses;
• Threats to consumers - think about the circulation of substandard medical products
• Threats to the environment and ecosystems - think about the smuggling of timber, which in many parts of the world is contributing to massive, unsustainable deforestation, which in turn, accelerates climate change:
• Empowering organized criminal networks, for which smuggling activities are an important source of proceeds, which are then reinvested in other criminal activities or used to consolidate territorial control, finance their infiltration in the legal economy, etc.

 
In addressing smuggling - either in general or in relation to specific manifestations - I always find it useful to examine the problem in terms of its drivers, enablers, and the possible responses to it.
 
Let me then start with the drivers. I will mention just a few:

• Firstly, when people think about smuggling, they instinctively think about tobacco, alcohol, oil - these are all products subject to a special form of taxation – excise duties. And indeed, experience shows that the existence of tax differentials across jurisdictions - especially between neighboring countries – acts as a powerful incentive for smuggling activities from the low-tax environment towards the high tax environment. The same applies to goods that receive governmental subsidies. While these subsidies are introduced for the laudable cause of making basic necessities more affordable to local consumers, a good chunk of them ends up in smugglers’ pockets.
• Secondly, historically a significant driver for smuggling has been the imposition of economic embargoes against certain countries. The problem here is that even when the economic sanctions are lifted, the smuggling mentality, the illegal trading routes have been created and continue to be used for new types of contraband.
• And then you have the type of smuggling induced by a strong demand for goods whose trade is prohibited or subject to quotas (a typical example is the smuggling of protected wildlife species).

 
Turning to the enablers:

• The role that corruption plays in facilitating, in making smuggling possible, will never be emphasized enough. It's not just corruption at borders. There are many points, along product’ supply chains, where goods can be siphoned off through corrupt behavior. For example, research has shown that medicines are stolen from hospitals and then smuggled thanks to bribes given to doctors, nurses, hospital staff. Fake or tampered export licenses are provided by employees of regulatory agencies in exchange for undue advantages, etc.
• Also, it should not be forgotten that smuggling networks rely on the cheap and abundant workforce provided by members of disadvantaged communities - often living in border regions - that would do anything to scrap a living. Unfortunately, these are very often the people who get caught and brought to justice while the kingpins remain at bay.

 
Which leads me to say something about the ways to respond to smuggling practices. Without claiming to be exhaustive, there are two or three of points worth throwing into the discussion:
 

• Nowadays, we have cutting-edge track and trace solutions available to industry and law enforcement actors to monitor the movement of goods throughout supply chains. GPS-based monitoring, radio frequency and, most recently blockchain. Moreover, when track and trace solutions are combined with use of the newest authentication tools against counterfeiting, we really have powerful means to detect any leakages in supply chains. There is no dearth of highly reliable technological tools. What's still missing is the willingness to connect them; In a word: to ensure their interoperability, and this applies to both proprietary and non-proprietary solutions. To a good extent, the challenge is no longer a technological one. It is about coordination, pure and simple. And it shows, in my opinion, that technology can become an amazing anti-smuggling tool, but also lead to the opposite direction: towards more fragmentation and silos. It all depends on the direction in which we decide to steer it.
• A few minutes ago, I mentioned how tax differentials across jurisdictions are a powerful driver for smuggling. I would add that countries are sovereign and thus free to set taxation levels to pursue their policy objectives. Often, for example, they decide to increase the excise tax imposed on tobacco and alcohol products to disincentivize the public from consuming them on health grounds. The problem is that too frequently these public policy decisions don't take into account the whole picture. Intuitively, if you increase taxation levels for certain products beyond a certain threshold, you end up fueling the black market. This is why it’s critical that measures adopted in the field of health or taxation should not be taken in isolation. Any proposed change in the regulatory landscape should be part of a comprehensive evaluation and a real strategy on how to deal with the full range of expected consequences in the security domain.
• Last but not least, risk management. This should become the new paradigm in efforts to detect illicit consignments flowing across borders. It's not a new concept, but one that is still not sufficiently implemented. Once we agree that it makes no sense to rely on random checks, or to open for inspection every single cargo container that shows up at a road, air or maritime border, we are left with one option: make choices about what to inspect, prioritize, and optimize our use of scarce law enforcement resources. Risk management applies not only to customs, but also to decisions by the police on when and where to conduct raids, by investigators on when to resort to – often very costly – special investigative techniques such as “controlled deliveries”, etc. But in order to do so in a meaningful manner, we need to assess the risk and create “red flags” based on sound intelligence; we need to be able to rely on advanced cargo information on a systematic basis. Here again, technology in the form of big data analytics and artificial intelligence can make the difference. Equally important is the creation of sustained flows of information between public authorities and the private sector. Industry is a critical part of the equation, and this is why at TRACIT we are forging partnerships with intergovernmental agencies such as the UN Office on Drugs and Crime to ensure, for example, that one of their flagship anti illicit trade initiatives - the Container Control Program - can benefit from private-sector input.

 
Let me conclude by saying that smuggling is one of the oldest activities that humans have engaged in since they have organized themselves in sovereign political communities. It cannot be eradicated, but it can be better controlled, and its consequences mitigated.
I very much hope that this important event will contribute to rejuvenating efforts in this area and steer policy-makers’ agenda towards renewed attention for this problem.