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IRAQ: CUSTOMS REFORM AND MODERNIZATION STRATEGY

February 2014 The Iraq General Commission of Customs (IGCC) is committed to modernizing its operations and organization to meet the economic objectives in a difficult security environment, and will strive to achieve transparent, ethical, and efficient operations. In the short to medium-term, the priorities of the Customs administration shall focus on (i) improving the import system to supply the economy with the necessary goods; (ii) promote schemes supporting the manufacturing sector and leading to exports; and (iii) generate sufficient revenue to sustain the state while reducing dependence on oil-generated revenue. 1. The Economic Background Iraq’s economic growth prospects are favorable due to increasing oil export revenues. Oil exports accounted for 42.1 percent of the country’s GDP, 99.5 percent of its exports, and 93 percent of its fiscal revenues in 2013. Export value is expected to increase from US$93.9 billion in 2013 to US$98.5 billion in 2014, and import value from US$72.6 billion to US$75.3 billion in 2014. Imports represent approximately 30 million tons, more than 50 percent of which is transported overland. In addition, a significant volume of market or "suitcase" trade takes place at all borders. Iraq’s main economic challenge is to diversify the economy and restore domestic production. This would require stimulating private-sector activities in non-oil sectors. Trade policy and FDI would play important roles in achieving this objective. Taking advantage of regional complementarities and economic integration potentials is an important component of Iraq’s economic program. Through the New Levant Initiative, countries in the region (including Iraq) have the opportunity to benefit from economic complementarities and comparative advantages for deeper economic integration. The role of Customs administration in trade facilitation is important to reach trade facilitation targets. The trade regime currently in place in Iraq is determined by the Coalition Provisional Authority’s Orders 38 (Reconstruction Levy) and 54 (Trade Liberalization Policy) introduced in early 2004. Order 54 kept parts of the 1984 Customs Law but suspended all customs tariffs, duties, import taxes, and similar surcharges for goods entering and or leaving Iraq. It also restricted certain items’ imports (magazines, films, CDs contrary to public norms, arms, nuclear material, and non-medical narcotics) and exports (some food items, animals, and manufactured goods). Order 38 established a 5 percent reconstruction levy on all imported goods except food, medicine, and medical equipment, clothing, books, and goods delivered as humanitarian aid. Starting from January 2014, Iraqi authorities initiated the first phase of customs tariff implementation. This first phase will affect 106 goods with customs duties imposed by no more than 20 percent of their value. For other goods, 5 percent reconstruction levy is still in effect. Iraq is currently participating WTO meetings as an observer. The country applied for WTO membership in 2004, and a Working Party was established to examine Iraq’s application. Iraq submitted its Memorandum on Foreign Trade Regime in 2005, which serves as the basis for discussions. Iraq is currently preparing its Goods and Services Offers. This will enable Iraq to

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put in place the necessary legislation, build the local capacity to implement the policies, and lock in the reforms with WTO membership. Iraq is a signatory of 100 trade and economic agreements in trade in goods with 85 countries, and 175 agreements in trade in services with 81 countries. Most of these agreements provide MFN treatment for trade in goods. Iraq is potentially a major transit country (Maps 1 and 2 below). The border crossing of Zharko (Ibrahim-el-Khalil) registers 3,000 heavy trucks entering daily from Turkey, and it can be estimated that figures would be comparable albeit slightly lower at the ten other major crossings of the country. The port of Umm Qasr handles slightly under 50 percent of Iraq's imports—in 2008, about eight million tons of cargo and 100,000 twenty-foot-equivalent units (TEUs). But according to some estimates, its capacity could be brought to 500,000 TEU.

Map 1: Road Corridors of Iraq and the Region

Source: World Bank.

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Map 2: Major Transit Routes in Iraq

Source: World Bank. This operational environment should drive the IGCC's approach over the coming three to five years to (i) adjust to existing conditions and ensure adequate Customs control over cross-border movements and trade, (ii) support the development of these exchanges, and (iii) establish an administration capable of adapting to a changing economic and social environment. This is far from the case currently, as different international indicators highlight the weak performance of Customs:

First, the country itself ranks poorly in terms of ethics: The latest Transparency International Index shows that Iraq is placed 171 out of 174 in terms of perception of corruption.

Second, the World Bank's six-dimension Logistics Performance Index (LPI) indicates that, although the country slightly improved its overall ranking between 2010 and 2012, this was not the case for the Customs score, which on the contrary denotes a sharp drop in performance and efficiency.

Table 1: The LPI Score for Iraq

Year LPI

Rank LPI

Score Customs Infrastructure International shipments

Logistics competence

Tracking & tracing Timeliness

2010 148 2.11 2.07 1.73 2.2 2.1 1.96 2.49 2012 145 2.16 1.75 1.92 2.38 2.19 1.86 2.77

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Third, Iraq ranks systematically at the bottom of the list compared to its neighbours. The gap is particularly telling for Customs, and is accentuated by the model of Turkey, which performs at international best practice levels. (This should encourage Iraq to follow as much as possible the Turkish model, and introduce many of the modern features that characterise the Turkish Customs administration—partly borrowed from Western Europe, and partly inherent to the historical background of Turkey.)

Table 2: LPI Regional Comparison

Country LPI

Rank LPI

Score Customs Infrastructure International shipments

Logistics competence

Tracking & tracing Timeliness

Turkey 27 3.51 3.16 3.62 3.38 3.52 3.54 3.87 Saudi Arabia 37 3.18 2.79 3.22 3.1 2.99 3.21 3.76 Syria 92 2.6 2.33 2.54 2.62 2.48 2.35 3.26 Lebanon 96 2.58 2.21 2.41 2.71 2.38 2.61 3.11 Jordan 102 2.56 2.27 2.48 2.88 2.17 2.55 2.92 Iran 112 2.49 2.19 2.42 2.49 2.66 2.49 2.66 Iraq 145 2.16 1.75 1.92 2.38 2.19 1.86 2.77

In addition, the trade and Customs tariff regimes—over which Customs have little control—may prove stifling: There is some inconsistency in tariff rates (some raw materials are charged higher rates than finished products). The trade regime implies widespread licensing obligations. Both are now being addressed, which would facilitate improvements in Customs operations. To address trade-related bottlenecks Iraqi Customs Administration is keen on putting in place a comprehensive reform and modernization program focused on adoption of international standards as well as investment in infrastructure. Iraq has made a good start to improve its investment climate, but much needs to be done to create an investment-friendly environment to stimulate both domestic and foreign investment in order to diversify its economy led by the private sector. 2. The Current Political Economy of Border Control The IGCC strategy must take into account existing and predictable conditions, even though Iraq's situation remains volatile. This implies a highly adaptable organizational model, with contingency measures for downgraded situations, adequate networking and communication, and the capacity to adjust to the evolving traffic and security situation. a. Traffic is bound to increase. Current volumes mirror the post-conflict environment, but as the economy recovers, imports and exports will rise. This is particularly the case for oil exports, as production will rise gradually by about 400–500 thousand barrels per day (bpd) per year, reaching 5.7 million bpd by 2018. The non-oil sector will also grow by about 5/6 percent and reach 51 percent of GDP in 2018. Overall, growth will remain above 8 percent over the medium term.1 This will affect the distribution between goods imported and will also impact informal trade as well as smuggling. Passenger traffic (20,000 per year at Umm Qasr ferry terminal) is also likely to increase with improvements in the security situation.

1 IMF Article IV consultation, 2013.

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b. The revenue base will change. While oil sector provides more than 90 percent of budget revenue, an oil-dependent economy remains fragile. Diversification of revenue sources is therefore essential. Revenue from Customs duties should become a larger part of the budget. c. Clearance procedures are awkward and lengthy. According to the latest Cost of Doing Business survey, it takes about 12 days to clear goods on import and 13 on export.

Table 3: Duration of Import and Export Procedures Nature of Import Procedures Duration

(days) Nature of Export Procedures Duration (days)

Documents preparation 50 Documents preparation 50 Customs clearance and technical control 13 Customs clearance and technical control 15 Ports and terminal handling 7 Ports and terminal handling 12 Inland transportation and handling 10 Inland transportation and handling 5 Total 80 82

Source: Doing Business, 2013. Similarly, documentary requirements are quite high (10, compared to two or three only in Western countries), and should be streamlined:

Table 4: Documents Required

Import documents Export documents Bill of lading Bill of lading Certificate of origin Certificate of origin Commercial invoice Commercial Invoice Customs import declaration Customs export declaration Import license Export license Inspection report Inspection report Packing list Packing List Pre-shipment inspection clean report of findings Pre-shipment inspection clean report of findings Technical standard/health certificate Technical standard/health certificate Terminal handling receipts Terminal handling receipts

Source: Doing Business, 2013. This is aggravated by the presence of multiple administrations throughout the clearance process, leading to duplication of checks and bureaucratic procedures. It also further encourages corrupt practices and results in delays at the border. In addition, there are some weaknesses in domestic and cross-border coordination which affect crossing delays and create bottlenecks on both sides of the border. d. The Kurdish region paradigm may interfere with Customs reform. The Kurdish Regional Government (KRG) exercises control over the Customs houses operating within its region, with loose relations with the IGCC headquarters. This lack of control by the central government on Customs operations and revenue collection may require to be addressed, at least temporarily, through a duality in Customs territories (and there are examples of that environment, in particular in Jordan or the Palestinian authority). 3. The Diagnostic and Roadmap for Reform

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In April 2012, the findings of a World Bank diagnostic mission concluded with a set of recommendations, which also took into account some assets already in place.2 While not prioritized or phased, it stated the essential components that need to be factored under the IGCC's strategy. They are summarized below. a. Strategic planning is essential. A comprehensive and forward looking strategic modernization will ensure that reform efforts and support provided by the development community are well coordinated, coherent and contributing to national development objectives. The overall mandate of Customs as the coordinator of all import procedures on goods is very much under-estimated, and there is no clear understanding of the role of Customs as a body responsible for protecting society in addition to providing revenue, and this must be addressed. Such a plan will also cover all of the components listed in the WCO’s Customs Capacity Building Diagnostic Framework.3 b. Decisions on organization need to be made. A range of options must be provided to the Iraqi government. The review will focus on developing a structure better equipped to support a Customs regime and to better support the implementation of a range of “value added” functions that are critical to ensure the adoption of internally agreed standards and sensible good practice approaches. Designing command and control structures to ensure nationally consistent application of laws and procedures will be a key objective of the review. c. Infrastructure is insufficient. Current border station layouts and procedural organization lead to duplication of work (such as multiple inspections of same shipments by different agencies) or inadequate control over cargo, in spite of bureaucratic control. Furthermore, there is no precise information on dwell times and time for clearance and the efficiency of cross-border coordination is questionable. A comprehensive review of infrastructure needs, and their pertinence and ability to support institutional and procedural reforms, will be undertaken as part of the strategic planning process and appropriate provision made in the state budget to support long term infrastructure and equipment needs. d. A trained, professional, and ethical workforce is necessary. A comprehensive review of HRM policies will be carried out, covering all key staffing issues including recruitment, mobility, advancement, remuneration, ethics, and separation policies followed by the adoption of new policies designed to reinforce the merit principle in all key staffing decisions. This will be supported by a competency assessment and gap analysis. An effort will also be made to identify and retain older staff with previously acquired and demonstrated technical skills. e. A change management approach must be adopted. This implies a dedicated reform and modernization unit/team in IGCC headquarters to more effectively coordinate all key reform initiatives, to ensure effective communication with all Customs officials throughout the country and to more effectively manage the overall change process.

2 There have already been different initiatives for the modernization of Customs, provided by different donors, but they are isolated, address partial (and often local) issues, and need to be integrated. 3 The WCO Diagnostic Framework consists of guidance on ten core components of a comprehensive capacity building program: leadership and strategic planning; Customs systems and procedures; organizational and institutional framework; legal framework; resources (human, financial, and physical; information technology; external co-operation and partnership; change management and continuous improvement; good governance; and management information and statistics.

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f. Legislation needs to be overhauled. Although imperfect and out of date in many respects, the current Customs Code is adequate to support basic Customs operations. The key issue is that the Code does not seem to be applied effectively at most locations and to a large extent Customs authorities do not seem to be aware of some of its provisions. A review of legislation (Customs and other fields impacting Customs operations) will also be undertaken and appropriate changes will be submitted to Parliament. In parallel, implementing provisions and standard operating provisions will be drafted, and staff trained on them. g. Procedures shall be modernized and aligned to international best practice. Processes are segmented, often redundant, and prone to arbitrary decisions as well as errors. Furthermore there is no self-assessment mechanism in place, and this can easily lead to errors or fraud, and difficulties in prosecuting mis-declaration. Declaration control is weak, and key areas of Customs control, such as valuation, are largely ignored. New procedures will be drawn, with inputs from the business community, and tested, largely based on principles of client-segmentation and risk management.4 h. An automation master plan will be drafted and initiated. There is currently no adequate computerization, either at agency or station level, although an inter-agency information system could avoid fraud. i. A comprehensive performance monitoring system will be installed. It will be based on key performance indicators as well as improved workload statistics. This will involve the development of a reasonable number of appropriate indicators as well as means of collecting and validating data. 4. The Priorities of Customs As the immediate priority of the IGCC is to establish a functional and reliable administration that operates normally and is capable of adjusting to evolving circumstances, the components above need to be arranged in a way that enables immediate—albeit partial—implementation of crucial new measures urgently needed while preparing for the rollout of the comprehensive plan. Essential priorities are to establish: (i) An appropriate work framework; (ii) An IT master plan; (iii) Sufficient HR resources; (iv) A facilitation-oriented approach; and (v) Adequate tools for dealing with enforcement, disputes, and litigation. However, the IGCC does not start its effort from scratch: Iraq Customs have a long historical background, irrespective of the political context in which they operated, and this Customs culture should be factored under current modernization efforts. The first actions are destined to set a framework for future activities under the development strategy. This will provide an overall direction for technical measures, and will ensure monitoring and follow-up of the different components. a. The reform strategy must be based on a clear political roadmap. The government must decide what it wants Customs to do (and how):

Are Customs purely collecting revenue, or are they also in charge of a wider trade-related mandate?

4 Client segmentation is the adaptation of procedures to certain categories of operators, based on the specific requirements of trade and the level of risk they represent.

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As a result of their revenue collection role, should Customs perform other duties (i.e., non-fiscal related) due to their positioning in the chain of international trade transactions?

Who is responsible for ensuring that everything (and every one) that/who crosses the border is reported to Customs?

Who (and how) will prevent and prosecute fraud and smuggling, and enforce Customs and national legislation?

The notions of borders and Customs need therefore to be clarified. While there is a broad understanding the Customs provide economic security and protection to the domestic industries, collect revenue, protect consumers, and prevent smuggling, this is not adequately internalized by the various authorities, and leads to problems in definition and devolution, which in turn cause institutional ambiguity. A clear understanding of what Customs do, how they do it, and what are the necessary resources and powers to deliver on the mandate, is needed. This will inter alia help in understanding what the responsibilities are at the border and which agency should be in charge, thus avoiding overlaps and conflicts between administrations. Obviously the current security situation should be considered, but the development model for the IGCC should aim at a longer term vision of what the role of Customs is in a modern society.

Box 1: Organizational Models

Some of the possible models for Customs are: a. A purely clerical body in charge of collecting revenue. Customs officers accept declarations, apply measures of control to declared goods, assess duties and taxes, and collect revenue. There is some level of post-release control and checks, but very limited intelligence-based investigations, these being performed by another structure (for example, the Police or other investigatory bodies). In some cases, a Financial Police structure is established under the ministry of finance to handle such investigations. Customs tend to work like the Inland Revenue administration, and gradually focus more on document and records than on goods in movement. This model is not realistic. It was used under the Soviet system, when borders were closed by default, and most foreign trade was State-controlled, with very simple Customs systems (i.e., no temporary import or inward processing schemes), and a high reliance on Police surveillance. b. Customs are fully merged with Inland Revenue under a United Revenue Authority model. Although there is some distinction between Customs and Tax activities, most of the transversal functions (IT, HR, infrastructure) are pooled, management is unified (usually according to Inland Revenue lines) enforcement is essentially revenue-based and investigations are a spinoff of tax audits. This model was recommended at one time by the IMF, as it appeared to meet the revenue-collection objective in a streamlined way. However, it has two main flaws: (i) It assigns Customs to pure revenue activities, and limits in practice the society-protection aspects of Customs control, and (ii) it ignores the specificity of Customs work (real-time control over goods in movement) with an organization mostly geared to ex-post control of financial transactions. Experience in other countries shows that this model has proved disappointing in most cases. c. Customs are an autonomous body but have limited preventive and enforcement capacity. While Customs may have wide powers under the Customs code, these are restricted to specific areas (e.g., the border, and certain "Customs control areas" at other locations. What happens after the border is crossed inward is no longer a matter for Customs. This is a widespread model in transition and post-conflict countries, where the security situation usually warrants a strong military or Police presence at the borders or inside the territory. This prevents adequate control over transit (which implies in-movement checks on commercial vehicles), smuggling, end-use requirements (for example, ensuring that goods imported for one purpose or under a franchise scheme are not diverted), or domestic market-initiated investigations. In addition, modern tools such as selectivity of

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examinations or risk management are likely to be off-set by downstream checks performed by other policing bodies, with the likelihood, in case of subsequent detection, that front-line Customs officers will be blamed for not having detected the fraud upfront. d. Customs have wide powers on paper but are not in a position to exercise them. This is often the case in post-conflict environments, where Customs cannot access sensitive areas (e.g., the border line, or in some cases even border stations, so their powers are delegated to or taken over by another agency which does have the skills, training, organization, or even availability to apply Customs techniques to movements of goods. In a variation of this model, all powers of enforcement of Customs are delegated to a so-called "Customs Police" which, although theoretically under the operational command of Customs, is staffed, organized, and commanded by another ministry (usually Interior). This affects operations, and creates an unhealthy duality in Customs control. e. Customs are a Government agency, usually (but not always) placed under the ministry of Finance with autonomous powers regarding clearance and enforcement activities. These powers are adapted to the specificity of Customs work (unlike in penal law, which addresses personal acts, Customs law is based on the status of the goods, and only accessorily of persons). It provides Customs with the ability to deliver on its core mandate (policing of cross-border exchanges and associated revenue collection) as well as perform additional functions at no extra cost, due to the mere placement of Customs at a strategic location. In particular, it enables Customs to perform checks on behalf of other administrations and agencies, thus reducing the burden of clearance. This model corresponds to the traditional Customs organizational framework, and is in place in most in the US and most European countries (including Turkey). However, it requires comprehensive management monitoring, due to the extent of Customs powers, and opportunities for abuse and corruption). It can also range from a militarized, para-military, or fully civilian organization. Last, this model was largely in place in Iraq prior to 2003. b. The reform strategy requires leadership and commitment. Modernization plans are based on strong high-level commitment, constant monitoring, and the resolute support of a champion for reforms. Customs reform will inevitably affect vested interests, and may also create institutional friction between agencies. From a technical perspective, the reform process must be coordinated: Inputs must fall in place in the right sequence, various donor initiatives must be harmonized and synchronized, and more generally, when new measures are adopted the infrastructure and logistical support must be in place at the same time. This call for a special Strategic Reform Unit at IGCC headquarters which will, under the authority of the Director General of Customs, overview all aspects of the plan, report on progress, identify difficulties and blockages (and propose remedial action if needed). A steering committee consisting of the Director General, heads of strategic departments of the IGCC, and representatives of other ministries interacting with Customs, will meet twice a year under the chairmanship of the Minister of Finance. The strategic reform unit will have a permanent staff and will implement the directions provided by the steering committee. It will also provide day-to-day coordination of activities under the modernization plan, with effectiveness and efficiency indicators closely monitored; it will also ensure support and involvement of the end-users of Customs reform (i.e., the business community). If unforeseen institutional difficulties appear, the role of the unit will be to anticipate effects and propose alternative measures. Also, as part of the implementation of reforms, some actions may also be piloted at a test location, to test or validate one or several elements of the modernization strategy. c. Performance must be measured. As progress needs to be evaluated in terms of outputs, a set of indicators will be introduced which will provide a baseline (before the strategy is

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implemented) and regular updates on key aspects of Customs activity (including, but not limited to, clearance delays, revenue collections, detection of fraud, and staff efficiency). 5. The Reform Agenda First, the different steps of the strategic reform process must be logically phased so the whole plan can be implemented effectively. Customs need to have an appropriate work framework before it can implement any type of procedural or operational reform. Appropriate training of staff can only start once a staff management policy has been put in place. Infrastructure needs to be designed to support operational policies, so these must be revised and approved by the time new facilities are erected. Networking between offices is a key IT component, but requires adequate monitoring. Procedural streamlining can only be effective if there is back-up investigatory and enforcement capacity. Second, all modernization measures must also be consistent with international standards, especially the International Convention on the Simplification and Harmonization of Customs procedures (Revised Kyoto Convention), which provides for:

Transparency and predictability of Customs actions; Standardization and simplification of the goods declaration and supporting

documents; Simplified procedures for authorized persons; Maximum use of information technology; Minimum necessary Customs control to ensure compliance with regulations; Use of risk management and audit based controls; Coordinated interventions with other border agencies; Partnership with the trade.

Third, international tools, standards, and agreements must also be introduced (e.g., Customs valuation, rules of origin, transit rules, agreements of temporary admission, road transit, international cooperation and mutual assistance). As acceding to and complying with these provisions may take some time, this process will be launched immediately. The IGCC will also contribute to the WTO accession process, by providing the Government with the necessary statistical data and advice on procedural requirements. As a first step, the IGCC will focus on reinforcing control over goods and their immediate clearance. The phasing of the technical measures will ensure continuity with present operations and immediate efficiency gains. The IGCC will launch the following activities (in sequence, but speed of progress may vary from one item to another, so several components may/should run in parallel):

Network major Customs locations with IGCC headquarters, so there is daily reporting of declarations lodged, revenue collected, and frauds or irregularities detected;

Design the outline of a comprehensive IT plan for all Customs activities (clearance, management information systems, staff management, handling of violations, and collection and processing of intelligence;

Select a computerized clearance system, and install at one or several pilot locations (starting with Baghdad and major traffic centres);

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Carry out a critical review of all current clearance procedures with a view to streamlining and simplifying them;5 Define an immediate and longer term clearance and control policy, with the gradual introduction of warehousing, temporary import, and inward processing schemes; Review free zone operations, and establish adequate Customs control over these;

Test a pilot risk management scheme; Initiate a legislative review in line with the modernization strategy, which will

encompass not only Customs law but also other legislation affecting Customs operations, and draft appropriate amendments or new legislation;

Establish an organizational template for headquarters and field operations, with a staffing matrix, job descriptions, and reporting mechanisms;

Prepare a preventive and enforcement plan; Design in parallel a comprehensive staff management master plan, including medium

to long-term recruitment plans (i.e., with corresponding annual budget provisions), disciplinary provisions, training and re-training, career profiles, remuneration, incentives and rewards, and pensions.

Review infrastructure needs and prepare a rehabilitation and construction plan; establish inland (and to some extent, border) bonded warehouses as mentioned above;

Fully introduce risk management; Identify control equipment needs and design in parallel policies for its utilisation; Progressively deploy an enforcement structure destined to support Customs controls

and reinforce the investigations capacity; Adopt user-friendly processes and customized procedures for larger operators; and Develop a transit system for (i) border-to-border and (ii) border-to-inland (and

reverse) traffic; Accede to international transit agreements. 6. The Detailed Program Categories a. IT and communication Under the current situation, there is no adequate computerization, either at agency or station level. Although some piecemeal applications exist in some locations, they are not satisfactory. The IGCC urgently needs a modern customs processing system to support operations. Without such ICT support it is not possible to implement international standards or modern risk-based approaches to Customs administration, ensure national uniformity of operation, and collect timely and accurate management information and trade statistics. Moreover, the lack of an effective system impacts heavily on cargo clearance times, revenue collection and accounting, transparency, and the predictability of trade processes. However, unlike many other countries, Iraq has an extensive fiber-optic national back-bone that extends to most if not all major border crossings and ports. This will facilitate the implementation of a nation-wide customs system.

(i) Territorial networking. The first measure will be to connect major Customs locations with IGCC headquarters, so there is daily reporting of declarations lodged, revenue collected, and frauds or irregularities detected. This will serve two purposes: 5 This review should also include non-Customs procedures (e.g., licensing requirements, or non-tariff related inspections) currently managed by other agencies, with a view to consolidating them under a broader border management approach.

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Ensure some level of consistency in operations between different locations, with the

ability of national headquarters to monitor work, and eventually take corrective action; and

Prepare a network for future computerization, as well as establish a culture of centralized management and supervision.

In addition, the networking will provide a comprehensive telecommunication service (data transfer, internet, voice communication) preparing for subsequent remote monitoring of operations (transmission of scanned images, online intervention in clearance, video-surveillance).

(ii) Clearance software. There are numerous commercial Customs system offerings that could be suitable for Iraq. The IGCC will review the systems available, and once there is a clear picture of what the modernized/simplified Customs processes will be, the IGCC will draft systems specifications, which will then allow the selection of a computerized clearance software. An international bidding process will be initiated, under the supervision of a specialized technical committee working in coordination with the IGCC IT department.

Box 2: Customs Systems

Main Features of a Clearance Software The basic modules for Customs clearance software are: - Declaration capture and processing - Calculation of duties and taxes - Cargo reporting and inventory control - Risk management and management of physical examinations - Accounting Additional modules include Customs brokerage, warehousing, statistics, transit, suspense regimes, and management information systems. Last, Customs systems require the ability to interface with other applications (private sector and other administrations) to provide an integrated system which manages holistically all cross-border transactions, ideally under a Single Electronic Window concept. The security situation needs to be taken into account for the development and implementation of the IT system, as it is unlikely that foreign contractors would, under current circumstances, be able to work effectively anywhere in Iraq. Therefore, based on an approach used previously in a post-conflict country,6 a laboratory version of the Customs software will be prepared by Iraqi and international experts out of the country. Basic training will also be provided to Iraqi Customs officials outside the country, and once completed will be deployed in Iraq using domestic resources. This may delay the usual 12 to 18 month period required to launch similar systems in other countries, but will save time and resources in the long run. The potential problem of having two separate systems in the IGCC and in KRG Customs will be averted by ensuring the initial prototype is developed jointly and with the assistance of the donor community.

6 Implementation of the ASYCUDA software in Bosnia and Herzegovina in 2000.

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(iii) Continuity of operations. Like with any other computer system, it is essential to ensure that operations will not be disrupted by a technical incident or a criminal/terrorist action. A disaster recovery/business continuity site will be implemented with redundant network links, and in the event of a network or system outage, the system will be able to switch over to the “hot-backup” site, with no loss of data or functionality. This will also reduce the risk of wilful loss of data in case of a breakdown initiated by criminal interests.

(iv) Clearance software value-added products. While the main function of the clearance software is to establish control over entering goods, process declarations, assess duties, and maintain accounts, it has the capacity to provide additional value-added services, one of the main being a risk management approach. As soon as the clearance system is in place, a pilot Risk Management System (RMS) will be operated, with the data base gradually populated using statistical data obtained from the clearance system itself, and additional intelligence inputs. To ensure that this crucial aspect of Customs operations is properly managed, a dedicated risk management unit will be installed in IGCC headquarters. After a period of test piloting, the RMS will be extended to all computerized locations. Non-computerized locations will be instructed to adopt a similar risk-based approach, using local intelligence, with adequate reporting mechanisms to the national risk management unit.

(v) Management information systems. The next step in Customs computerization will be the development of different reports and alerts that will keep management (at every level) informed of performance and anomalies and exceptions. This is a key managerial tool that also plays a major role in detecting or preventing corrupt practices.

(vi) Other Customs applications. These come under further developments which will need to be defined. They include all the usual modules under off-the-shelf clearance software, such as warehousing, inward processing, transit, follow-up on conditional release goods, as well as applications not traditionally included in this type of software (e.g., staff management or intelligence data base). In addition, computers and power supply will be installed at major locations where they are not present at this time, to be used for simplified cargo tracking (see b (i) and (ii) below).

(vii) The KRG paradigm. It will be necessary to ensure consistency between operations in IGCC in Baghdad and Customs Administration in KRG and avoid that the two systems diverge. This will be achieved through a unique systems development unit, adequate telecommunications (ensuring quasi real time monitoring of operations), and unified clearance policies. b. Procedures At this stage, the clearance process in Iraq is essentially characterized by (i) very approximate cargo reporting and inventory processes; (ii) multiple inspections in the absence of a legally binding declaration; (iii) no self-assessment system (declarations are often filled by Customs officers); and (iv) practically no post-release verification capability. This implies the need to introduce a complete procedural package meeting international best standards, which will take time. In the interim period, it will be necessary to outsource some of the Customs functions related to commercial clearance to private operators, under a Pre-Shipment Inspection (PSI) scheme. Such arrangements have proved successful in other countries, as long as they were limited in time and accompanied by the establishment in Customs of the

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necessary systems and procedures, as well as intensive training of Customs officials. Typically, PSI schemes can cover valuation, origin, overall characteristics of the goods, and, outside the area of Customs, technical inspection for standards and health. The IGCC will immediately identify the scope of work for a PSI scheme. The work will be done in collaboration with other ministries and agencies involved. The specifications for the PSI system will address:

Duration;7 Involvement of Iraqi Customs staff and interaction between the IGCC and the PSI

operator; Fees and performance standards of the PSI operator; and Exit strategy (with full implementation of national systems and procedures, training of

staff, and handing over by the PSI operator of its Iraqi database of imports). During the same period, the IGCC will design and introduce specific procedures:

(i) Imports by the general public. While this may not seem a high revenue-earner, there are reasons for addressing this type of imports early on in the reform process:

Large numbers of people bring in large quantities (i.e., verging on commercial) of goods across borders. This trend is likely to continue for a few years until the Iraqi economy can produce the consumer and household goods currently imported under "suitcase trade.” As it may also cover some forms of contraband, it is essential to keep this traffic under control, while recognising it is playing at the moment an important economic and social role.

Large numbers of pedestrians or private vehicles tend to crowd border stations, which are already heavily jammed by commercial traffic. As individual and non-commercial import procedures are easier and faster to implement, dealing with this kind of activity will relieve some of the congestion.

This will also be a test for future procedural streamlining. A specific import procedure for cross-border and non-commercial passenger trade will be put in place. It will be based on simplified declarations, a single rate of duty charged on either declared values, or, if impracticable, recognized international values, and will include an annual cap on the volume of transactions permissible for each importer. Identification of these "suitcase traders" will be by means of their passport s; a simple software, on the lines of the one implemented between Armenia and Georgia for similar trade, will be installed at all border points, and connected to IGCC headquarters. Where Customs are not in a position to monitor this traffic at a border station, inland checkpoints manned by Customs staff will apply these control and assessment measures.

(ii) Cargo control. It is currently difficult for Customs to establish precisely (a) what enters Iraq, (b) what is waiting in the border area, and (c) if what is exiting was actually released for domestic consumption. The main concern for Customs is to establish control over entering goods (by means of a brief description, capture of the invoice and shipping documents, and identification of the vehicle). A Customs position will therefore be established immediately after the border line, where Customs officers will monitor all

7 A period of three years of full PSI operations, followed by a transition period of one year would appear adequate.

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entering traffic. A similar design will be adopted for outward traffic, so that Customs can certify the reality of an export. Customs officials will also man the exit (inward) gates of border facilities, and will ensure that goods only leave if they have a release note signed by Customs officials. This activity shall not be delegated to any other administration or agency. Within the border station, Customs will set up a surveillance mechanism that enables IGCC officials to know at all times where vehicles are, and what their status regarding clearance is. This will be done initially through an amendment to the current procedure of the control slip, which will be recorded in a simplified computer system where available, and manually in other cases. When Customs officials are not present at a border location, they will establish an inland checkpoint at a reasonable distance from the border, as provided under the present Customs law.

(iii) Declaration lodging. As a Customs declaration is considered internationally as "the act by which a person states his intention of taking goods across the border with a view to assigning them a Customs regime," declarations will be considered as a legally binding document filled and signed by the importer or his representative. The international Single Administrative Document (SAD) will be adopted immediately. When some of the fields cannot be filled due to lack of supporting procedures, importers will be, under the overall control of IGCC headquarters, to temporarily fill only part of the SAD. The same shall apply, as a transition measure, to codes that are insufficiently documented under current Customs practice (e.g., the full six-digit classification code under the international Harmonized System—HS).8 Declarants will no longer be allowed to correct the declarations once they have been accepted and registered by Customs officials, and they may be prosecuted for false declarations. A short transitory period will be introduced to allow importers to adjust to these new measures, which will be widely advertised.

(iv) International standards. The GC will immediately introduce the SAD, HS nomenclature, Agreement on Customs Valuation, rules and other international instruments (e.g., rules of origin) at points of clearance.9 Documents will be made available to all importers and clearing agents, as well as simple explanatory notes. At major locations, a Customs official will be designated to provide some assistance to importers, but will in no case substitute himself to them.

(v) Technical inspection. While different agencies operating at border crossings will continue, as an interim measure, their checks, these will be largely amended based on two principles:

During the period during which some technical inspections will be outsourced to

private companies under the PSI arrangement and may take place in the country of shipment, Customs will be the recipient of all certificates and documentation issued

8 A similar approach was adopted in Albania in 1992, when Customs were insufficiently familiar with modern tariff classification. At first only the first two digits (i.e., the tariff chapter) were used, and progressively importers were asked to fill the next two digits (tariff heading), and subsequently the last two digits (sub-headings). Albania now uses the eight-digit HS code and Combined Nomenclature. 9 While the concepts are in place at IGCC headquarters, they are not properly used at points of clearance.

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by these companies. Customs officials will have the authority, given at managerial level, to dispute the findings on these certificates and request a new technical inspection to take place, organized by the relevant Iraqi agency. This will remain exceptional and closely monitored by IGCC headquarters.

When technical inspections take place at the border or point of entry, inspections will only take place after the import declaration has been lodged, and all inspections will be grouped so that one consignment needs not be inspected several times.

(vi) Physical inspection by Customs. The underlying principle is that inspections will

only take place if there are sufficient grounds to justify them, and release without physical examination will be the norm. This does not preclude a level of inspection commensurate with the type of risk identified, but inspections will only take place as a result of a documentary review of the declaration and supporting documentation. When inspections take place, they will be followed by a detailed examination report filled by the examining officer(s) with their findings. Inspections need not be over-detailed, and can merely consist in numbering parcels, random selection for opening, or weighing. Customs officers will be made aware that they are committing themselves to the findings they document on examination reports, and are liable for their actions. Some counter-examinations may be performed either at the request of management, or by an audit body.

In particular, physical examination should not require, in most cases, the total

unloading of goods and their storage in a warehouse. Such occurrences should be limited to cases when serious fraud or irregularity is detected. At land borders, goods will be mostly cleared on the vehicle in which they entered (unless there is a trans-loading), thus reducing the need for large scale infrastructure for storage.

(vii) Review of declarations. Once the goods have been released, a special unit in the Customs house will review some of the declarations, to detect possible errors or omissions. When an anomaly results in a short-payment of duty, importers will be called to pay the difference, and in cases of repeated negligence or deliberate fraud, a penalty shall be inflicted. IGCC headquarters will also establish a skeleton post-release unit, which will select declarations randomly form all Customs houses, and review them. This unit shall gradually expand into a full-fledged post release control department.

Box 3: Checks and Audits

The Levels of Customs Declaration Control For a number of years, there appears to have emerged a misconception about Customs levels of control, with a simple distinction between primary control when the goods and declarations are presented to Customs for clearance, and what is (wrongly) designated as "post clearance audit—PCA." This is fact an over simplification. Pre-arrival checks These are based on advance information or intelligence. Such checks have been formalized in the EU and the US (advance lodging of the manifest, Entry Summary Declaration (ENS) and Import Control System (ICS) in the EU). They are usually performed by a targeting unit, and are destined to pre-identify transactions for scrutiny. A specific risk management software can be used. Declaration checks These are part of the clearance process, and use the clearance system's risk management module. They usually consist (in sequence) in (i) a documentary review, and, if necessary, a physical check of the goods. Declaration review

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Reviews of cleared declarations are performed either in the Customs house or (preferably) at a regional or (occasionally) national level. Their purpose is to detect clerical or other errors that may have escaped attention during front-line clearance, and they also serve a useful purpose in detecting corruption. For this last reason, it is better that reviews take place away from front-line staff. Post-clearance checks Post-clearance checks are a more comprehensive, usually desk-bound, review of declarations. Importers may be asked to provide additional information or justification, and Customs may visit importers and request documentation. Post-clearance checks are performed at regional or national level, by a specialized unit, and are often coordinated under an annual plan of control (e.g., all imports of a specific commodity, or all transactions carried out by a number of importers). Post-clearance audits These audits are in between post-release checks and investigations. They are often intelligence-led, and have increasingly been aligned to fiscal audits, although the methodology is not the same. Post-clearance audits are usually strictly organized by law, imply procedural guarantees for the firms which are audited, and can include the seizure of documents. Customs investigations Unlike the other checks, Customs investigations are often not initiated directly by a transaction, but by a set of intelligence sources leading to an importer and not necessarily a transaction. The investigation aims at detecting irregular imports which may not have been properly, or at all, declared. They usually follow common law investigation procedures, and may be subject to the approval and supervision of a judge.

(viii) Other procedures. A critical review of all other current clearance and warehousing procedures will subsequently take place, with a view to streamlining and simplifying them, or aligning them to international best practice (as in the case of warehousing, inward processing, or free zones). Attention will be paid to "suspense regimes," whereby goods are allowed to enter the Customs territory without payment of duty, subject to certain conditions. The overarching principle will be that Customs shall exercise uninterrupted control over all goods that have not been released for free practice onto the national territory (to avoid fraud and smuggling).

Box 4: Example of Best Practices for Warehousing10

The EU Approach to Warehousing Under the EU Code (article 180), goods may be placed under any of the following categories of special procedures: (a) transit, which shall comprise external and internal transit; (b) storage, which shall comprise temporary storage, customs warehousing and free zones; (c) specific use, which shall comprise temporary admission and end-use; and (d) processing, which shall comprise inward and outward processing. This first shows that warehousing is one of many other possible regimes, and second it makes a clear distinction between the different types of storage, in particular the temporary keeping of goods that have been unloaded but not yet declared for a Customs regime, distinct from the Customs regime of warehousing, which can take many different forms. In this respect, article 205 further stipulates that Customs warehouses may be available for use by any person for the Customs warehousing of goods (public Customs warehouse), or for the storage of goods by the holder of an authorisation for Customs warehousing (private Customs warehouse). The purpose of these distinctions is to establish the organisation of the regime (which differs depending on the type of warehouse), conditions for warehousing, and, more important, the liability of the warehouse keeper

10 This will also affect the infrastructure development master-plan.

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compared to that of the owner of the goods. It should be noted that all forms of warehousing imply a bond or guarantee (hence the expression “bonded warehouse” to ensure that goods kept on the premises can be represented to Customs at their first request, failing which duties, which were suspended on entry, are properly recovered. Categorization of different warehouses A possible categorisation may be made by ownership or kind of activity. 1. In the case of ownership, there is a difference between public and private warehouses. Public warehouses are normally operated by port or airport authorities, railways, chambers of commerce, or specialized firms. When the institution that operates the warehouse is a public or semi-public entity, and it is considered sufficiently reliable, the operator is not obliged to provide a guarantee. In the case of private warehouses, the operators (including freight forwarders, consolidators, or warehouse keepers) must always lodge a guarantee corresponding to the approximate risk incurred in terms of revenue should the entire warehouse be destroyed or looted. (The idea is that destroyed goods are deemed placed on the domestic market for home consumption, and Customs are therefore accountable for the collection of duties on them, even if they no longer exist.) 2. Regarding activity, warehouses may accept certain goods only (as in the case of refrigerated stores), or goods belonging to certain persons exercising certain types of activities. While in general warehouses the only activity permitted is limited to handling, safekeeping, labelling, or preserving the goods, there are “industrial warehouses” where goods may be processed under an inward processing regime. There are also export warehouses, and, for obvious reasons these must be distinct from other warehouses. Free zones are in fact a complex of warehouses and manufacturing facilities enclosed by a single Customs line. They are operated along the same lines as ordinary bonded warehouses. 3. Private warehouses on the premises of an importer represent a different category, and, due to the greater risk incurred, are subject to higher guarantees. Commercial activity, such as retail selling, is prohibited in most cases, except in duty free stores, which are a particular form of warehouse, and require a special form of guarantee. All these specifications should be laid out by Customs when approving the warehouses. Controls In all cases, an inventory control should be carried out regularly, at least once a year, and preferably more often (an inventory control once a month is usually recommended). These controls are unannounced, and are part of the responsibilities of the local Customs house manager. Government auditors may also perform their own controls over warehouses. Normally, the warehouse operator is expected to keep a register of all entries and exit, with an indication of the justification provided for exit (e.g., a Customs declaration number, an arson report, or an insurance report stating the destruction of the goods). Delays Warehousing delays vary, but increasingly tend to become unlimited. The purpose is not to keep goods indefinitely, but to offer flexibility for operators, especially when a technical process on the goods is envisaged, or when importers do not have an immediate market opportunity. Best practice examples for Customs clearance areas Clearance areas are often confused with Customs warehouses. In Western countries, these clearance (or very temporary storage) areas exist at (i) seaports and airports (where they are known as “transit sheds”), land borders (“clearance areas or landing stations”), or inland Customs houses, where they are part of the “Customs yard.” The mode of operation depends on who owns these facilities and where they are placed. After presentation and lodging of the summary declaration, the goods have the status of being in temporary storage until they are assigned to a Customs approved treatment or use (e.g., release into free circulation). While in temporary storage, goods may not be removed, opened or examined without Customs permission, and may only be handled in a way which preserves them without changing them. They may be stored only in places approved by Customs. These are called ‘temporary storage facilities.’

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Wharves and transit sheds in ports may be approved as places for temporary storage purposes subject to conditions being met. Traditionally, the time during which goods are kept at a land border clearance area is very limited, as in most cases goods will be forwarded under a transit regime to an inland clearance location for final clearance. This is because the time required ascertaining that the goods correspond to the transit documentation produced and for establishing (or confirming, as in the case of TIR) a transit document is short. However, the obligation remains for the transporter to produce the goods by the shortest possible route from the border to the border station’s clearance area, and goods can only be removed with Customs authorisation. These clearance areas are normally immediately adjacent to the border station (usually known as a Customs house, as Customs long pre-existed any other agency at the border), and are typically operated by Customs. If they are not (as often in the case of airports), the operator is expected to lodge a guarantee, as he takes full responsibility towards Customs for representing entered goods and for handling them. Operators would normally be chambers of commerce, airport authorities, or even freight forwarders/consolidators. At inland clearance locations, the Customs yard is a part of the Customs facility. This is because Customs want to have physical control over the goods while the documentation is prepared and processed. It also follows the logic that a physical examination will only take place as the result of a preliminary documentary control, and that the documentary control itself will guide the physical examination. After a Customs regime has been assigned to the goods through the clearance of a declaration, goods can be removed and either disposed under a home consumption regime, or placed in a warehouse or under any other suspense regime. As in the case of border stations, Customs yard may be owned by Customs, or, when Customs are housed in the vicinity of a large import complex (warehouse, freight consolidator, logistics center) by the operator of the complex. Private sector operation again requires the lodging of a guarantee.

(ix) Trade facilitation. The current approach is essentially adversarial in nature and not conducive to effective trade promotion. Consultation arrangements between Customs and the trade will be formalized, to ensure effective two-way communication and resolution of outstanding issues. These stakeholder consultative fora will take place both in HQ and regional offices.

(x) Clearing agents. There has been some discussion on the competence of clearing agents, many of which are competent, but some of which may be professionally challenged. The IGCC will install a joint commission consisting of Customs executives and representatives of the brokerage industry. This commission will set the standards for Customs clearing agents, and will examine cases of malpractice (and make recommendations to the Minister of Finance as to the disciplinary measures to be enforced). The Commission will also determine the means of testing professional qualifications, conditions of entry into the profession, and examine disputes between clearing agents and their clients when they beyond the domain of commercial law. c. Legislative review

(i) The IGCC will initiate a legislative review in line with the modernization strategy, which will encompass not only Customs law but also other legislation affecting Customs operations, and draft appropriate amendments or new legislation. A legislative commission, including representatives of other ministries and the Prime minister's office, will carry out this review, with technical inputs from the different departments of IGCC. The current Customs law shall be retained as much as possible, so to avoid disruption in operations. In particular, the enforcement powers of Customs shall be maintained, but organized according to a new governance structure.

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(ii) As a result of this review, a comprehensive package on the control of international trade and cross-border movements will be drafted and submitted to Parliament. In parallel, the commission will direct the preparation of second and third degree sub-legislation, and the IGCC will start drafting Standard Operating Provisions (SOP), so that as soon as the legislative package is voted, it can be enforced.

(iii) An essential aspect of the legislative update will be the introduction of provisions

in the Customs law regarding electronic filing of declarations, payment of duties, and the ability to file using an electronic signature. This will be coordinated with other laws covering e-Commerce or digital signature. d. Organization The organizational layout of Customs will depend on (i) policy decisions made by the government as described under 4 (a) above; and (ii) operational decisions to be made at IGCC level. These include the type of clearance policy to be adopted and the management structure of Customs. The choice is between clearing goods at the point of entry, or at the place of destination. In the former case, Customs houses at border stations become de facto the leading field authority. If inland clearance is preferred, Customs houses would then be placed under regional directorates (this was the model in the previous period).

Box 5: Clearance Models

The Place of Clearance Whereas in the traditional model, Customs were considered as a "gate keeper" and operated where goods were likely to enter the Customs territory, there has been a shift in the past seventy years towards clearing inland, at the place where goods are actually consumed. There are several reasons to this: Borders have become porous With the increase in trade, it has become increasingly difficult for Customs to maintain a presence wherever there is traffic – and traffic may change from one route to another far more rapidly than Customs can adjust. There are many areas where Customs cannot maintain a presence, for a variety of reasons, but where traditional trade routes cross. Last, political difficulties may lead to smuggling or unofficial routes being operated. Border clearance is expensive It implies a large Customs presence to simply process declarations, and collect revenue. As security is often more relaxed at borders, this involves additional cost and hazard in keeping and transferring cash, also opening opportunities for fraud and diversion of funds. Traders must visit the border to take possession of their goods, or delegate clearing agents, who are not always sufficiently professional. Technical expertise is not always available everywhere If goods are cleared at the border, they may need to be examined by specialists, or analysed. It requires the presence of specialists and specialized infrastructure, failing which clearance delays may be considerably extended. There is a risk of poor practice All over the world, Customs are faced with the paradox that similar regulations are enforced differently at different locations. In the extreme case, this is known as "port shopping" where an importer selects a Customs house for its comparative leniency. Thus, a trend for clearing inland has gradually emerged in many countries (but not all) Economies of scale are generated Expensive equipment and facilities may be pooled in one city, and therefore can be better outfitted.

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Importers save money Not only they do not have to travel to distant places, or convey instructions which may or not be followed, but also they save on handling costs (clearance takes place at the point of delivery, so there is only one unloading), warehousing fees (when goods are cleared at the border, they are often kept for a period of time in a warehouse). The centre keeps better control Response is more rapid in the case of complaints, management can make surprise audits or counter-checks, the reporting chain is shorter and more effective, and company managers have better access to senior executive. Legalities and technicalities can be solved far more rapidly. However, there are added difficulties Goods are in transit This means that goods on which no duty has been paid, move freely within the Customs territory. The only way to control this is through a solid transit management scheme and preventive roadside checks which can only be performed by Customs. Furthermore, some goods may be dangerous, and allowing them inside the territory is already a hazard. Whereas the European countries have moved to inland clearance (due to industrial density, adequate audit trails, and a general high level of compliance), transit fraud is a major cause for revenue leakage in the EU. Other countries or regions have adopted clearance at the border: This is the case for large countries, where transit times are long anyway, so the border cost becomes marginal. In the US, two thirds of imports are cleared at the first point of entry. However, a large country like Russia clears goods at destination, but to avoid transit fraud has established tight border control, which results in effect in clearing goods twice. Ukraine is in the same situation. The decision can be balanced It is often preferable to have a flexible policy: According to the Revised Kyoto Convention, importers should have the liberty to clear where they want. While they would mostly choose inland clearance, a possibility to clear close to the border (but not necessarily at the border point itself) should be offered. As a first option, this possibility should be offered to trusted carriers and importers (with even the possibility to clear on the importers' premises). Importers located close to the border should also have the possibility to clear at the point of entry. One way of preventing the system from getting out of control would be to prohibit some clearances (i.e., for goods requiring complex examination and procedural steps) from taking place either inland or at the border. Last, "suitcase trade" should always be cleared at the border, as it is practically impossible to trace such goods at the point of destination. The same could apply to loose cargo, or cargo needing to be transhipped. In the case of Iraq, the security situation would rather encourage clearance at the point of trans-loading, as foreign drivers may be reluctant to travel too much inland. However, the situation will evolve positively, and all options should be left open. Once these decisions are made, the IGCC will establish an organizational template for headquarters and field operations, with a staffing matrix, job descriptions, and reporting mechanisms. (See charts 1 and 2 below as a possible template of national and regional headquarters.) (i) Headquarters status. The entire headquarters structure will report to the IGCC director general. Together with the director general (possibly assisted by a deputy), it will constitute the executive arm of the Customs administration. Each headquarter unit will act by delegation of the director general, with thresholds of responsibility. When a specific department issues instructions, they are considered as coming from the director general.

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(ii) Headquarters organization. An organization chart will be drawn showing the areas under the direct purview of the director general (including internal audit and the integrity unit), and those under the authority of chief commissioners. Headquarters units will deal with policies, and, in exceptional cases, individual matters of a high political incidence. (iii) National units. These are operational units with a national zone of intervention (e.g, investigations, enforcement, Customs training centre). They will be placed under the director general to ensure a direct chain of command all the way to field offices, and avoid local or regional interference. (iv) Regional headquarters. They will serve as an intermediary between national headquarters and field offices, thus ensuring a proper chain of command from policy level to operational activities. In some cases (i.e., smaller regions), regional headquarters may be merged with local Customs houses, although there will be a distinction between regional level responsibilities and clearance operational processes. The regional level will also manage operationally the enforcement units, the post-release control structure, and relations between Customs and the business community at provincial level.

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Chart 1: Example of Headquarters Organization

Intelligence

Investigations

Customs houses

Customs Operational Centre / Command Centre

Preventive Squads

Human Resources

Public Relations Officer

National and Regional units

Preventive Service Staff Headquarters

Regional collectoratesInvestigations

(Regional)

Anti-f raud Branch

Performance Management

Relations w ith the private sector

The external environment

Client services

AEO Segmented

Clients

Technical Resources

Archives and Documentation

Who w orks in Customs EnforcementThe resources for Customs How Customs w ork

Transfers

Paperless environment

Centralised Accounting

BudgetPolicy for technical means

Classif ication

Legal Affairs

Training Policy

RecruitmentRisk Management

Discipline

Collections and Audit Policy

Administration and Operational Resources

Customs Control

Off-line Control Policy

Director General

Deputy Director General

Headquarters Departments

Inspectorate

Customs Academy

Internal Audit Ethics and Internal Affairs

International RelationsProcedures, Partnership and Facilitation

Front Off ice

Statistics Technical Assistance

Advisors

Strategy, Research,

and Planning

International organisations

Customs Judicial

Investigators

Appeals

International Agreements

Career Management

Special Regimes

Exemptions

Salaries ands Bonuses

Off ice IT and Telecommunications

Cooperation with other

Administrations

Preventive Commander

Transactional Settlements

Prosecution and

Enforcement

Legal unit Court cases

Origin

Valuation

Mutual Assistance

Asycuda

Information Technology and Statistics

Application Development

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Chart 2: Example of a Regional Headquarters Organization

General Af fairs Legal AffairsEconomic Affairs and

Authorisations Post-release Checks

Customs House

Local Preventive Squad

Headquarters Anti-f raud Branch Preventive Staff HQ

Regional Investigations

Preventive Commander

Deputy Director

Regional Collector

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e. The preventive and enforcement wing of Customs Customs in their role of controlling whatever crosses the border need the ability not only to ensure that all movements are reported and documented, but also to detect what is fraudulently taken into the Customs territory. This smuggling fraud may take place in three different ways:

Goods do not cross the border at an approved point, and do not reach the Customs facility, or by-pass it;

Goods inside the Customs territory which have not been cleared for consumption by Customs are diverted; and

Although following an approved road and going through a Customs house, goods are concealed and obviously not declared to Customs.

To deal with the first point, Customs must have a presence, not only at the border stations but also along the border line or within a strategic zone in the immediate vicinity of the border. In the second instance, Customs need both an inland intervention capacity (to perform targeted checks on vehicles coming from the border) and investigatory powers (to detect through intelligence or other sources goods which were not declared). In the last case, Customs must acquire rummage skills, and supporting search equipment. However, depending on the way in which Customs are defined and organized, these functions may be delegated to other agencies (essentially the border and inland police forces, and occasionally the army). While there may be some justification on security grounds, this arrangement is seldom satisfactory, as other agencies do not have the skills, knowledge, intelligence sources, or international networks to carry out activities which are subsidiary to their main mandate, and if they had these skills, and time to exercise them, they would become de facto a Customs agency. Therefore, and irrespective of the organizational layout chosen by the Government for the IGCC, it is essential that the Customs administration develop its own preventive and enforcement wing. The following approaches shall be adopted:

(i) Customs police.11 Although mentioned under the current Customs law, the Customs police is rather independent from the Customs administration.12 Its mandate will be clarified, and it will be placed under the hierarchical structure of the IGCC organization, at regional headquarters level. While at the moment, the Customs police is there essentially to protect Customs officers, its role will be expanded to participate actively in all Customs activities related to the prevention and detection of smuggling. In parallel, the respective roles of the Border police and Border station security will be re-examined with the relevant authorities, to ensure there is no interference with Customs work. Staff from the existing "Customs police" will be retrained so that they become primarily Customs officers with an enforcement or investigatory capacity. Additional police and military training will be provided to enable them to operate in security-sensitive areas.13 11 The term of "Customs Police" is not correctly used in Iraq. It is either a Customs or a Police force. A more appropriate designation is "Customs Enforcement," or "Customs Preventive Service." 12 In KRG it is placed under the Ministry of Interior. 13 There is a tendency in many countries in the world to turn this Customs preventive force into a para-military body.

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(ii) Customs investigations. First it is important to clarify that post-release (or clearance) audit is not a part of Customs investigations, although some audits may lead to investigations (see box 3 above). The role of Customs investigations is to uncover criminal activities, and less to ensure compliance. The Customs investigations unit will be placed under IGCC headquarters, and a specific organizational layout will be developed (by different types of fraud). The unit shall use existing powers under the Customs law, and will have the right to recruit and pay informants. f. Staff management This section relates to all activities covering staff issues in the IGCC. The IGCC will design in a comprehensive staff management master plan, including medium to long-term provisions.

(i) Staff status. A decision on the status of Customs personnel (or their different categories) needs first to be made. As a rule, Customs officers cannot be quite compared to other Government civil servants: They work day and night, often under dangerous or at the least uncomfortable conditions, and with a high level of physical activity. Customs work is increasingly highly technical, often requiring specialist skills. This results in the need for different pay scales that recognize the specificity of Customs work, and an adapted framework to deal with ethical issues. In some countries, Customs staff is divided into two streams, clearance and preventive, with a special remuneration and management regime for the enforcement wing. In other countries, Customs are aligned to the regime of the military or the police. To avoid creating two different bodies within the same nascent organization, it is proposed that the entire Customs staff will be placed under a specific status, with modular scales of remuneration and staff management depending on the sector of activity and level of risk (including hardship allowances, compensation for dangerous posting, technical expertise bonuses, and activity performance rewards).

(ii) Integrity. Due to their permanent, real-time, and discreet access to tangible wealth, Customs officers are more likely to face corruption issues than most desk-bound officials. Experience has shown all over the world that the level of corruption is not a reverse function of remuneration; sometimes even it is the contrary. The issue of integrity is therefore central to the staff management policy of Customs, but, as the WCO's Revised Arusha Declaration shows, integrity cannot just be addressed at HR level. In fact, the ten points of the declaration also constitute an excellent template for wider reforms.

Box 6: The Revised Arusha Declaration (2003)

Key Elements in the Declaration 1. Leadership and Commitment The prime responsibility for corruption prevention must rest with the head of Customs and the executive management team. The need for high levels of integrity must be stressed and commitment to the fight against corruption maintained over the long term. Customs managers and supervisors should adopt a strong leadership role and accept an appropriate level of responsibility and accountability for maintaining high levels of integrity in all aspects of Customs work. Customs managers should demonstrate a clear and unequivocal focus on integrity and be seen to set an example that is consistent with both the letter and spirit of the Code of Conduct. 2. Regulatory Framework Customs laws, regulations, administrative guidelines and procedures should be harmonized and simplified to the greatest extent possible so that Customs formalities can proceed without undue burden. This process involves the adoption of internationally agreed conventions, other instruments and accepted standards. Customs practices

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should be reviewed and redeveloped to eliminate red tape and reduce unnecessary duplication. Duty rates should be moderated where possible and exemptions to standard rules be minimized. Systems and procedures should be in accordance with the revised International Convention on the Simplification and Harmonization of Customs Procedures (Revised Kyoto Convention). 3. Transparency Customs clients are entitled to expect a high degree of certainty and predictability in their dealings with Customs. Customs laws, regulations, procedures and administrative guidelines should be made public, be easily accessible and applied in a uniform and consistent manner. The basis upon which discretionary powers can be exercised should be clearly defined. Appeal and administrative review mechanisms should be established to provide a mechanism for clients to challenge or seek review of Customs decisions. Client service charters or performance standards should be established which set out the level of service clients can expect from Customs. 4. Automation Automation or computerization of Customs functions can improve efficiency and effectiveness and remove many opportunities for corruption. Automation can also increase the level of accountability and provide an audit trail for later monitoring and review of administrative decisions and the exercise of official discretion. Where possible automated systems should be configured in such a way as to minimize the opportunity for the inappropriate exercise of official discretion, face-to-face contact between Customs personnel and clients, and the physical handling and transfer of funds. 5. Reform and Modernization Corruption typically occurs in situations where outdated and inefficient practices are employed and where clients have an incentive to attempt to avoid slow or burdensome procedures by offering bribes and paying facilitation fees. Customs administrations should reform and modernize their systems and procedures to eliminate any perceived advantages which might be obtained through circumventing official requirements. Such reform and modernization initiatives should be comprehensive in nature and focus on all aspects of Customs operations and performance. The Revised Kyoto Convention provides a sound reference point for such initiatives. 6. Audit and Investigation The prevention and control of corruption in Customs can be assisted by the implementation of a range of appropriate monitoring and control mechanisms such as internal check programmes, internal and external auditing and investigation and prosecution regimes. Such regimes should strike a reasonable balance between positive strategies to encourage high levels of integrity and repressive strategies designed to identify incidences of corruption and to discipline or prosecute those personnel involved. Customs personnel, clients and the general public should be encouraged to report corrupt, unethical or illegal activity and, when such information is provided, it should be investigated in a prompt and thorough manner and sources should be protected. Where large scale or complex investigations are warranted or in administrations where corruption is widespread, there should also be recourse to independent anti-corruption agencies. 7. Code of Conduct A key element of any effective integrity programme is the development, issue and acceptance of a comprehensive code of conduct which sets out in very practical and unambiguous terms the behaviour expected of all Customs personnel. Penalties for non-compliance should be articulated in the code, calibrated to correspond to the seriousness of the violation and supported by appropriate administrative and legislative provisions. 8. Human Resource Management The implementation of sound human resource management policies and procedures plays a major role in the fight against corruption in Customs. Human resource management practices, which have proved useful in controlling or eliminating corruption in Customs, include: • providing sufficient salary, other remuneration and conditions to ensure Customs personnel are able to maintain a decent standard of living; • recruiting and retaining personnel who have, and are likely to maintain, high standards of integrity; • ensuring staff selection and promotion procedures are free of bias and favouritism and based on the principle of merit; • ensuring that decisions on the deployment, rotation and relocation of staff take account of the need to remove opportunities for Customs personnel to hold vulnerable positions for long periods of time;

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• providing adequate training and professional development to Customs personnel upon recruitment and throughout their careers to continually promote and reinforce the importance of maintaining high ethical and professional standards; and • implementing appropriate performance appraisal and management systems which reinforce sound practices and which foster high levels of personal and professional integrity. 9. Morale and Organizational Culture Corruption is most likely to occur in organizations where morale or ‘esprit de corps’ is low and where Customs personnel do not have pride in the reputation of their administration. Customs employees are more likely to act with integrity when morale is high, where human resource management practices are fair and where there are reasonable opportunities for career development and progression. Employees at all levels should be actively involved in the anti-corruption programme and should be encouraged to accept an appropriate level of responsibility for the integrity of the administration. 10. Relationship with the Private Sector Customs administrations should foster an open, transparent and productive relationship with the private sector. Client groups should be encouraged to accept an appropriate level of responsibility and accountability for the problem and the identification and implementation of practical solutions. The establishment of Memoranda of Understanding between Customs and industry bodies can be useful in this regard. Likewise, the development of codes of conduct for the private sector, which clearly set out standards of professional behaviour, can be useful. Penalties associated with engaging in corrupt behaviour must be sufficient to deter client groups from paying bribes or facilitation fees to obtain preferential treatment. All of these elements are incorporated under the Customs modernization strategy. In addition, an Internal Affairs Unit will be established in IGCC headquarters. Its mandate will be to investigate cases of unethical practices and promote policies for reducing or preventing corrupt practices.

(iii) Training. A training centre will be established. It will be responsible for (a) recruitment, (b) initial training, (c) specialized courses, and (d) training trainers who will subsequently operate at regional level and provide local staff with updates on regulations, procedures, and operational issues. Initial training will be at least one year in the training centre with an extra six months of filed internship. Officers will be commissioned subject to satisfactory marks obtained during the training course and internship.

(iv) Staffing. The IGCC will prepare a staffing matrix for all Customs locations,

based on workload (as evidenced by performance indicators), and foreseen evolution of traffic. It will be used to assess the difference between current staffing and optimum figures, and some adjustments will be made through relocation of excess staff. Projections will be made over the next five years to determine the staff to be hired, based on (a) traffic and workload, (b) additional or new tasks, and (c) replacement of retiring staff. This will be translated into an annual intake at the training centre.

(v) Entry. All staff will be recruited through a competitive examination process.

There will be no lateral entry, unless a specific position needs to be filled by a specialist. Lateral entry staff will not be commissioned Customs officers, but will have the right to sit for the entry examination, and, if successful, will be commissioned at a rank equivalent to the one they occupied when they entered laterally.

(vi) Ranks. The rank structure will be open enough to allow an officer joining at

junior level to rise through the ranks through promotion, seniority, or competitive

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selection, throughout his career. A scale of seven to ten ranks, with a promotion every three years on average, will offer attractive career perspectives as long as each promotion involves a significant pay rise. (vii) Uniforms. All staff will wear a Customs uniform while on duty, with the exception of those involved in undercover operations. The uniform will be aligned to the design of army or police uniforms, possibly with a different color. To provide visibility to the Customs cadre, specific rank insignias will replicate police and army ranks, and reflect levels of responsibility corresponding to similar ranks in the army or police. (viii) Discipline and drill. Staff serving in Customs, in particular in the preventive and enforcement wing, will adopt army or police protocol when dealing with the public or other uniformed bodies. This will reinforce the image of the Customs service, as this type of training is proved to reinforce bonding within the administration, improve visibility and respect by the public, and indirectly reduce corruption. (ix) Retirement and pensions. Pensions will include a significant capital contribution to which the Government will contribute, which will be paid to officers honourably discharged at the end of their career. This will act as an incentive for honest and ethical behaviour. g. Infrastructure and equipment A review of infrastructure and rehabilitation needs will be undertaken.

(i) Improving existing locations. Existing facilities will be adjusted to meet new operational requirements, in particular with respect to inspection, off-loading, and storage areas, bearing in mind the need to consolidate all examinations, and the new examination policy which may reduce the need for large border warehouses (see section b. (vi) above). Clear traffic separation between different categories of users (light vehicles, lorries, border trade, border clearance, if and when the case) will be incorporated in the reshaping of facilities.

(ii) International best practice. New facilities will incorporate international best

practice, as suggested in chart 1 below. In particular, cross-border cooperation will be systematically envisaged, and whenever possible, co-location options with the other country will be explored.

(iii) Economic and traffic justification. New facilities will be installed where there is a

real economic need or where traffic projections suggest such a need will appear. (iv) Customs approval. The Government will ensure that no border crossing facility is

opened without Customs approval. Customs will also set approved roads leading from the border to the facility.

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Chart 3: Example of a Modern Border Layout

EXIT

Cars

Lorries

Buses

Lorries

Disinfection

No stop

Secondary Inspection

Secondary Inspection Bays

Detailed inspection

Immigration and Customs

Weighbridge

Primary control dock

Secondary control

Isolation / Hazard

Border Line

Administrative building

Immigration and Customs

Bus inspection hall

Other formalitiesExamination Bay

Channel preselection

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(v) The need for inspection equipment, in particular scanners, will be carefully evaluated and balanced against the cost of such equipment. Before a scanner is installed at any location, a protocol for its use, adapted to local conditions, will be prepared, which will include the following principles:

Scanning should never be systematic. Risk management of one sort or the other (e.g.,

using the computerized RMS or relying on intelligence or intuition) will always be applied.

The scanning process shall be clearly inserted within the declaration control procedure.

There will be a correlative progressive deployment of the enforcement structure destined to support Customs controls and reinforce the investigations capacity.

(vi) Involvement of the private sector. The IGCC will evaluate the possibility of

involving the private sector in the construction and maintenance of certain facilities, in particular warehouses. This is because: (i) private operators may need a particular type of warehouse for their own purposes (e.g., refrigerated), and responding to this need will generate additional traffic; (ii) private sector funding reduces the budget burden; and (iii) warehousing activities create revenue. h. Customized procedures As a next step, the IGCC will adopt user-friendly processes and customized procedures for larger operators. These may provide for:

Single Window system; Authorized Economic Operator status; Clearance of goods on the premises of importers; Deferred duty-payment schemes; Simplified and consolidated periodic declarations; and Special economic zones.

i. Transit When the situation in Iraq will allow it, international road transit will grow. Iraq will seek admission to the TIR Convention and introduce a seamless transit scheme, which will minimize procedures at borders. Legislative and regulatory provisions will be drafted if necessary, and the IGCC will facilitate discussions between the transport industry, the banking system, and chambers of commerce, to introduce a guarantee mechanism. As an intermediate step, the IGCC will prepare a domestic transit system for (i) border-to-border and (ii) border-to-inland (and reverse) traffic.