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International Business Group Warns of Illicit Activities in Free Trade Zones

Friday, May 17, 2013
Sandler, Travis & Rosenberg Trade Report

The International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP) released May 15 a report calling for increased regulation and better management of free trade zones to stop the “alarming trend” of the use of FTZs for activities such as counterfeiting, piracy, narcotics trafficking, smuggling and fraud. An ICC press release notes that while FTZs are designed to increase trade and attract investment by removing or reducing duties and tariffs, easing customs controls and reducing government oversight, these same incentives have simultaneously made it easier for criminals to set up illicit operations.

According to the ICC, the report aims to encourage national governments to retake control of FTZs by strengthening their adherence to international conventions, empowering customs authorities and striking a balance between economic benefits and controls. For example, the report highlights the “common misconception” that FTZs are considered outside the territory of the host nation and therefore not subject to national customs laws. It also shows how stripping customs agencies of their traditional revenue collection role with respect to FTZs has led to a further erosion, both real and perceived, of their non-tariff responsibilities, such as border inspections and seizures.

Drawing on international agreements, lessons learned from both effective and ineffective national legislation, the experience of intellectual property rights holders, and international best practices, the report suggests key actions for the World Customs Organization, the World Trade Organization, national governments and FTZ operators, including the following.

- The WCO should address FTZs as a separate category of entity for authorized economic operators that engage in best practices to protect from IPR violations and terrorist attacks on the supply chain.

- The WCO should modify the SAFE Framework to include recognition beyond supply chain security of AEO status for tariff and non-tariff measures, such as IPR protection, and open provisions for mutual recognition of AEOs with high compliance with tariff and non-tariff measures.

- The WTO should reinstitute an enforcement working group to undertake regular reviews of implementation of the Agreement on Trade-Related Aspects of IPR and explore the rapid expansion of, and abuses in, FTZs.

- The WTO should clarify that since TRIPS does not exclude FTZs, WTO members are obligated to apply TRIPS requirements to all FTZs within their territories.

- National governments should (a) clarify that FTZs, special economic zones, free ports, etc., are under the jurisdiction of the national customs authority, which has unrestricted rights to enter and observe operations, audit the books and records of companies in the zone, and validate goods status and conformance with tariff and non-tariff measures, and (b) grant customs authorities ex officio power to detain goods suspected of infringing IPR, including goods in FTZs, SEZs, free ports, etc.

- Particularly for integrated trading countries (e.g., COMESA, ASEAN), national governments should develop uniform customs rules, regulations and practices for FTZs, drawing on WCO and WTO provisions.

- FTZ operators should (a) conduct standard due diligence in accepting businesses into zones, (b) demand that national customs authorities apply best practices in exercising their authority in zones, and (c) consider exchanging data with national customs automated systems and recommend that FTZ companies do the same.

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