Strengthening Inter-Agency Cooperation and Coordination in the Implementation of the Strategic Trade Management Act With a View to Enhancing Trade Facilitation: A Philippine Customs Perspective

1. Introduction

Customs administrations around the world play a significant role in the collection of revenues, the facilitation of legitimate trade and in ensuring border security. In the context of strategic trade control, the core functions of Customs in border security are emphasised under operative paragraph 3(C) of United Nations Security Council Resolution 1540, obliging states to develop and maintain appropriate effective border controls and law enforcement efforts to detect, deter, prevent and combat, including through international cooperation, when necessary, the illicit trafficking and brokering in Weapons of Mass Destruction (WMD).

Customs plays a crucial role in strategic trade control enforcement due to its unique authority and responsibility for monitoring and controlling cross-border flows of goods, people and conveyances (World Customs Organization, 2019). Utilising these core capabilities to the exclusion of other government authorities, Customs can conduct risk profiling to identify high-risk consignments, detain and eventually seize shipments found to be in violation of customs laws and other regulatory laws.

The domestic legislation relevant to Customs in the Philippines, the Customs Modernization and Tariff Act (CMTA), implements regulatory laws such as Republic Act No. 10697, otherwise known as the Strategic Trade Management Act (STMA). In the case of strategic goods requiring authorisation from the Strategic Trade Management Office (STMO, the licensing agency in the Philippines) from the perspective of Customs, these goods are treated as regulated goods. As such, Philippine Customs relies on the STMO to determine whether there is a violation or not. In the absence of a violation, the goods are cleared from Customs. However, in cases in which the goods are found to be potentially subject to strategic trade controls, and thereby requiring a referral to the STMO, the clearance of the goods will be suspended pending STMO’s advice.

In 2017, almost two years after the enactment of the STMA, the Implementing Rules and Regulations (IRR) were approved by the National Security Council-Strategic Trade Management Committee providing guidance on the regulatory requirements imposed on exporters of strategic goods in the Philippines. As the lead agency responsible for the facilitation of exports, Customs transacts with various categories of exporters such as regular exporters of locally produced products, Customs Bonded Warehouse exporters and exporters in the economic and freeport zones. In the implementation of the STMA, citing Section 2 (a) of the IRR, the scope and coverage of the law includes any natural or juridical person operating within the Philippines who engages or intends to engage in the export of strategic goods from the Philippines including designated special economic zone and freeport zones.

2. Economic and freeport zones

Of particular interest to Customs are exporters from the economic and freeport zones, which are considered outside customs territory for the purposes of customs duties and taxes. It has been observed that control is more relaxed and there is less Customs involvement inside the economic and freeport zones, which makes it difficult for Customs to monitor the movement of goods (personal observation).

In addition, the declaration system used by registered enterprises in the economic and freeport zones, the Automated Export Documentation System (AEDS) is different from the customs declaration system known as the Automated Export Declaration System on the E2m (Electronic2mobile). In the former, the system does not employ risk-based selection criteria, and the approval of the export goods in the declaration system rests solely on the discretion of the zone manager whereas in the latter, it is embedded with selectivity criteria based on the parameters and risk profiles determined by the Philippines Customs’ Risk Management System.

Moreover, the AEDS only allows a 30-minute window for Customs to notify the zone manager at the zone if an inspection is warranted based on reasonable suspicions that illicit goods are concealed inside the container, or a derogatory report was received by Customs that needs to be validated. After the lapse of the window period, the container is allowed to exit the gate en route to the port of loading.

These limitations, combined with insufficient integration and utilisation of IT, result in a dearth of requisite data concerning cargoes inside free zones and render customs’ risk management-based controls (conducted for the purpose of preserving security and compliance without hindering legitimate cargo flows) virtually useless (Omi, 2019).

3. Memorandum of Agreement for trade facilitation

To effectively implement the STMA in the Philippines, and in keeping with the goal of facilitation of legitimate trade, the STMO, the Philippine Bureau of Customs, and the Investment Promotion Agencies (IPAs) signed a Memorandum of Agreement (MOA) on Trade Facilitation on the Export of Strategic Trade on 17 November 2020.

This MOA paved the way for the creation of a Technical Working Group (TWG) on Trade Facilitation to establish effective coordination and cooperation mechanism to harmonise procedures, formalities, and documentation to facilitate trade and implement strategic trade management, as well as organise and implement Commodity Identification Training (CIT) for frontline officers.

The salient provisions in the MOA pertain to information sharing, risk management, capacity building to support CIT for frontline officers, and reachback mechanisms with a view to enhancing trade facilitation and supporting the export industry in the Philippines.

It is therefore essential that a close working relationship among Customs, STMO and IPAs be established for the effective implementation of the STMA in the Philippines.

4. State of play in the implementation of the STMA

4.1. Information sharing mechanism

Since the signing of the MOA, the STMO regularly updates Customs on approvals and authorisations including pending applications, which are fed into the risk management system to flag exports that may potentially evade strategic trade controls. Through the information-sharing provision in the MOA, the STMO and the Customs Risk Management Office coordinate to update risk profiles and selection criteria on relevant Harmonized System (HS) codes specific to dual-use goods to identify transactions that are high risk and may be non-compliant.

4.2. Training and capacity building

Training and capacity building activities on commodity verification and identification have been conducted for frontline officers at 17 ports of loading in the Philippines to enhance identification of strategic goods. In an ongoing effort to enhance strategic trade control and enforcement, a schedule of training programs was planned for 2022−2023 to benefit customs officers outside customs headquarters who have little or no training on strategic trade control enforcement. Further, training materials focusing on strategic trade control are currently being developed for inclusion in the Bureau of Customs online learning portal. Through a Train-the-Trainer program, a pool of trainers is undergoing extensive training in preparation for the official opening of a dedicated Customs Institute in the Philippines.

Senior officials and operational personnel have also benefited from the trainings provided by the WCO through its Strategic Trade Control Enforcement (STCE) Program. The STCE Program is the WCO mechanism and toolset through which customs administrations can access training and materials to support their implementation of the customs element of UNSCR 1540 (McColm et al., 2019).

4.3. Reachback

Most outbound cargoes at the Port of Manila that are targeted for reachback support are shipped by registered business enterprises from the economic and freeport zones in the Philippines. These shipments have a separate export declaration system from the customs declaration system principally used by non-registered enterprises and are, therefore, outside the scope of the Philippines Customs Risk Management System.

Generally, these exports are from the semiconductor industries and industries involved in the manufacture of machine tools, automobile components, and other highly specialised equipment.

Relying solely on the export declaration and shipping documents during cargo clearance formalities, customs officers’ working knowledge on commodity identification and verification are put to the test. Encountering shipments which are highly technical in nature, customs officers turn to the STMO for reachback support. The coordination on reachback support between Customs and STMO has improved significantly since the inception of the MOA. Receiving timely feedback is important to minimise any delay in facilitating cargo clearance of a shipment referred for reachback. Customs and STMO employ various communication platforms when reachback is needed, in addition to sending electronic mails.

5. Gaps and challenges in the implementation of the STMA at Philippine ports

To facilitate the export of goods at the 17 ports of loading within the territorial jurisdiction of the Philippine Bureau of Customs, trade control examiners are trained to identify goods requiring licences, permits, and clearances from regulatory agencies. Some of these products require licences from the Food and Drug Administration (FDA) and quarantine offices under the Department of Agriculture for plants, aquatic and animal products. Customarily, trade control examiners are familiar with the types of commodities that are routinely shipped at the ports. Trade control examiners are also trained to classify commodities in the ASEAN Harmonized Tariff Nomenclature (AHTN) to check the correctness of the declared tariff classification for a particular export.

In view of the implementation of the STMA as part of the Philippines’ commitment to fulfil its obligations under UNSCR 1540 and the capacity building provisions of the said resolution, trade control examiners are expected to have a working knowledge of the legal framework of the STMA, international treaties, sanctions, embargoes, and multilateral export control regimes and undergo intensive CIT. Even for an experienced trade control examiner who has had extensive training and expertise in various aspects of border protection, this presents significant challenges. In the area of strategic trade control and enforcement, it is critically important for trade control examiners to undergo intensive CIT given the highly technical nature of strategic commodities. Familiarity with relevant UN sanctions and embargoes is also essential to properly facilitate legitimate trade in real time and detain suspicious shipments exported without a licence or those with licences that are at high risk of being diverted to a country of concern. A key trade control responsibility for Customs is the enforcement of embargoes and sanctions (WCO, 2019).

Trade control examiners across the Philippines have differing levels of access to training that can support their implementation of strategic trade controls and sanctions. It is imperative that these officers undergo comprehensive CIT to develop a better understanding of the law, particularly the catch-all provision, and to request for reachback support from the STMO, if warranted. Otherwise, without rigorous training and a detailed knowledge of the relevant legislation, trade control examiners may unwittingly allow the movement of sensitive goods within the supply chain.

It is especially challenging for Customs to monitor the movement of strategic goods in the economic and freeport zones in the Philippines. As a matter of procedure, imports of raw materials enter the zones through transit. After manufacturing these raw materials into finished goods, they are then withdrawn from the economic and freeport zones for loading at a seaport or airport.

As defined in the Revised Kyoto Convention (RKC) (WCO, n.d.), a free zone is a part of the territory of a contracting party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the customs territory.

Economic zones and freeport zones in the Philippines are treated as free zones pursuant to the definition in the RKC and the customs domestic legislation exempts these goods entered or admitted in the zones from duties and taxes. As of 30 June 2022, there are 1,522 exporting enterprises operating in various economic zones in the Philippines under the control and supervision of the Philippine Economic Zone Authority (PEZA).

There are economic benefits and incentives accorded to registered locator enterprises in the free zones and evidently, the economic growth contributes greatly to the benefit of the country hosting these economic zones. However, there are numerous reports of illicit transactions in the free trade zones. According to CRDF Global (n.d.):

Beyond the threat to the host country, poorly managed SEZs [Special Economic Zones] also present a threat to international security, especially regarding weapons proliferation. Zones are frequently used as transshipment points by state and non-state actors working to procure goods and materials destined for weapons programs. Proliferators are constantly endeavoring to acquire a long list of “dual-use goods”; that is, goods that have both civil and military applications. (para. 2)

A notable weapons proliferation network was the AQ Khan network (MacCalman, 2016). It took advantage of the vulnerability of free trade zones owing to the fact that there is less customs control and supervision over these transshipment points. This allowed the unimpeded movement of controlled materials and components. Regarding this network, Viski and Michel (2016) write:

In the many books and articles that are available regarding the Khan network, all note that free trade zones in Dubai were critical in allowing nuclear technology to reach Iran, DPRK [Democratic People’s Republic of Korea], Libya, and other states. While the Khan case may be the most famous, a Wisconsin Project timeline noting “UAE [United Arab Emirates] Trans-shipment Milestones” lists at least three dozen cases implicating free zones in the UAE with proliferation cases. Documented cases begin in the 1980s, and increase almost proportionally to the growth of number of zones and expansion in terms of incentives offered by the zones. Some examples include German uranium enrichment components shipped illegally to Pakistan; mustard gas and nerve agent precursors shipped from India to Iran; attempted export of a high-speed oscilloscope from the Netherlands to Pakistan; export of maraging steel from Belgium to Iraq; export of heavy water from Germany to India, all of which involve UAE free zones as trans-shipment points. These were followed by several unveiled cases of Dubai free zones being used by the Khan network. (p. 36)

6. Vulnerabilities in the economic and freeport zones

Philippine Customs does not have access to trade data of all exports coming out of the economic and freeport zones. This is attributable to the fact that the customs declaration system is entirely distinct and separate from the AEDS used by registered locator enterprises in these zones. The non-integration of these two systems presents a significant challenge in terms of risk profiling and targeting of illicit strategic goods. As previously discussed, the AEDS is not integrated with a customs’ risk management system that would, under normal circumstances, allow the targeting of potentially strategic goods based on risk indicators and parameters set by the Customs Risk Management Office. The AEDS is a unique tool that is designed exclusively for registered business enterprises to facilitate the prompt release of their goods in the zone. It is embedded with a bar code that only allows a 30-minute window period in the system for Customs to notify the zone manager if a specific container requires inspection to validate an intelligence report received by Customs. After the lapse of the window period, Customs is precluded from conducting an inspection and the container will be released from zones after scanning the bar code on the export declaration. Thereafter, the container reaches the port of loading to undergo cargo clearance formalities prior to loading on the vessel.

Outbound cargoes are time-sensitive given the commitment of the supplier to its buyer to deliver goods in a timely manner. Acknowledging the role of Customs in facilitating trade in real time, this highlights the trade control examiners’ role at the ports of loading as a last line of defence in border security. Effective strategic trade control and enforcement is demonstrated when trade control examiners can identify strategic goods from export declarations and shipping documents by applying their CIT and knowledge on the catch-all provision of the law including relevant sanctions and embargoes. Strategic goods represent only a fraction in the global supply chain. The goal is to be able to facilitate shipments of strategic goods with requisite authorisations, and detect and interdict shipments of illicit strategic goods.

Another gap identified in the AEDS is the lack of familiarity of the zone manager in identifying strategic goods during the lodgment process in the system. Procedurally, the AEDS is managed by a zone manager who has the discretion to allow exports to be lodged in the system under the pre-approved list of goods and regulated goods, which require permits/licences from a specific regulatory agency like the STMO. Strategic goods listed in the National Strategic Goods List (NGSL) that fall under the category of regulated goods and other such items, though not listed in the NSGL, may come within the purview of the catch-all provision of the law. As such, these require authorisation from the STMO. The zone manager should know first-hand if the goods require permits before they approve the export declaration. In the case of strategic goods, the zone manager should be able to identify strategic goods from the list of goods declared in the system or, at the very least, be cognizant of the catch-all provision in the STMA. Once the goods are identified as being strategic, the registered locator enterprise is obligated to submit a licence to the zone manager. If the registered locator enterprise fails to present a licence, it is incumbent upon the zone manager to disapprove the lodgment outright in the AEDS. The role of the zone manager is critical at the lodgment process, without their approval, the export declaration will not proceed in the system and ultimately, strategic goods without proper authorisation from the licensing agency will not be able to leave the port.

7. Case study

A case involving a registered locator enterprise in the economic zone was referred to the STMO citing alleged violation of the catch-all provision of the law. The case stemmed from a confidential intelligence report shared with the STMO that was later shared with Customs pertaining to a shipment of servo motors bound to a country of concern. Invoking the MOA entered by Customs with STMO and PEZA, a coordinated effort from the agencies successfully located the goods in question.

In this instance, the shipment was yet to leave the warehouse. Due to the timely intervention of the partner agencies involved, the goods remained at the warehouse pending an evaluation and review by the STMO. Subsequently, after a careful and thorough review of the application for authorisation, the STMO denied its application citing as its basis the catch-all provision of the law. Without the cooperation of key government stakeholders following receipt of the intelligence report from a foreign partner, the goods would have left the country and may have been diverted to a country of concern for a prohibited end use.

8. Recommendations to address the implementation challenges of the STMA

This paper has highlighted the challenges faced by Philippine frontline customs officers and the zone managers in the implementation of the law and the non-integration of the two declaration systems making it difficult for Customs to manage exports in the free zones.

The WCO released a document entitled Practical Guidance on Free Zones (WCO, 2020) to help customs administrations address risks of illegal activities in free zones. As described by Milton (n.d.):

While still not legally binding, the WCO Practical Guidance are an important step towards improving governance of free zones. With 183 members, the WCO carries significant weight in global trade, and especially in Customs matters. This guidance, coupled with the abovementioned recommendations from the OECD and the precedent set by the Tobacco Protocol, can be seen as a precursor to mandatory inclusion of Customs in the establishment and operation of free zones all over the world. (para. 3)

It cannot be denied that in every customs organisation there are competing priorities. Some agencies prioritise the interdiction of narcotics, some illegal waste, others IPR infringement. Given that illicit strategic goods represent a small fraction of goods within the global supply chain, in some agencies their detection may not be adequately prioritised in terms of the allocation of resources and capacity building.

The reality on the ground in the Philippines is that most customs officers do not have the relevant and appropriate skills to identify strategic goods. Most officers are not even aware that the STMA is already a law and is being implemented after the IRR were approved by the National Security Council-Strategic Trade Management Committee in 2017.

This lack of awareness of the law can be best addressed through close coordination with the STMO and the Customs’ Training Division to work collaboratively on the development of a training curriculum on strategic trade control and enforcement. Training modules should include tabletop exercises on possible scenarios of sanctions, evasion tactics employed by proliferators and other nefarious actors in the supply chain.

The Customs Training Division should conduct rigorous training and deliver Train-the-Trainer programs from the rosters of customs officers. Also, Customs should consider making a request for technical assistance from the WCO through its STCE program for the conduct of training designed for CIT and accreditation of prospective trainers. The development of a refresher course is also highly recommended for those who have previously undertaken training on CIT to highlight recent and evolving updates and amendments on UN sanctions and embargoes.

The TWG on Trade Facilitation has been a useful platform for government stakeholders to identify choke points in the facilitation of goods in the economic and freeport zones, including implementation challenges in the law. During the last TWG meeting, CIT-related capacity building activities for zone managers were identified as priority. The key objective of such capacity building activities is to ensure zone managers can detect suspicious transactions and deter any attempt to circumvent the law during the lodgment process in the AEDS.

It is timely that a CIT be conducted for zone managers and other frontline officers at the freeports in preparation for the imminent implementation by the STMO of ‘No STMO Authorization, No Export of Strategic Goods’^[1] starting 1 January 2023. For future training, it would be useful to facilitate an opportunity for CIT for zone managers and frontline officers at freeport zones to work together on tabletop exercises facilitated by the STMO. A joint CIT will be a good opportunity for key frontline officers to foster good working relationships given the imperative of cooperation and coordination among agencies involved in the implementation of Strategic Trade Control (STC).

The issue of separate declaration systems is a matter of policy. It requires mutual agreement among Customs, PEZA and freeport authorities to address the issue of insufficient integration of systems resulting in inaccurate data on cargoes withdrawn from the economic zones. Interestingly, all government stakeholders are on board to push for the integration of both declaration systems. They acknowledge the importance of a uniform declaration system for all stakeholders to plug the loophole on inaccurate data and, more importantly, integrate the risk management system principally for targeting and profiling of high-risk containers. This idea has gained traction and a draft Customs Memorandum Order mandating the interface of both systems has been developed. All concerned government stakeholders have been properly consulted and have submitted their inputs to the Customs’ IT Department and the Project Management Office. Continuous consultations are also under way between government stakeholders and Value-Added Special Providers (VASPs) to ensure that the system is ready for integration. In anticipation of the interface of both systems, one VASP has already conducted an online demonstration of the updated version of the AEDS to ensure smooth transition for users and government clients such as zone managers and key customs officers in Metro Manila. Another planned online demonstration is scheduled to cater to user-clients outside Metro Manila.

The interface of these two separate declaration systems will be beneficial to all stakeholders as there will be improved transparency and accuracy of trade data. More importantly, the integration of both systems will allow Customs to have direct access to the data of all exportations in the economic and freeport zones. The quality of data generated from the system will be extremely useful for the Customs Risk Management Office to create risk profiles for targeting of risky and non-compliant transactions.

9. Conclusion

It is an aspiration of every customs organisation to keep their borders secure and safe by maintaining effective strategic trade control. To achieve this goal, Customs and other relevant key government stakeholders must work together to overcome implementation challenges in the law while ensuring that legitimate trade is facilitated in a timely manner.

The WCO Practical Guidelines in Free Zones (WCO, 2020) is a useful publication in which Customs could introduce amendments to its existing policies to combat illicit activities in the economic and freeport zones, specifically focusing on the effective control of strategic and potentially strategic dual-use goods.

A more effective solution to mitigate risks of STMA violations is the integration of both declaration systems used by Customs and economic zones with a unified risk management system. Philippines Customs is poised to roll out the interface of both systems in 2023.

This proactive approach by key government stakeholders in addressing the vulnerabilities in the current export declaration system is a testament of the whole-of-government approach that is needed to achieve an effective STC in the Philippines.

Customs officers, zone managers and freeport zone frontline officers should continuously receive training on CIT through a robust foundational training program and specialised courses to equip them with the relevant skills to target and profile illicit strategic goods.

Finally, given that it has been more than six years since the implementation of the STMA, a self-assessment on the current STC system is warranted to revisit existing policies, identify loopholes and weaknesses in the global supply chain, and, if necessary, to call for a national commitment to develop new policies and strategies to address emerging proliferation threats.

Acknowledgments

The author would like to thank Professor Bryan Early, Director, Project on International Security, Commerce, and Economic Statecraft (PISCES) at the Center for Policy Research University at Albany, State University of New York and Ms Anneka Farrington, Program Facilitator, Transnational Security Centre, RMIT University for their valuable guidance and recommendations to support the development of this paper.