Customs Reform in Afghanistan: Moving Between Introduced and Pre- exis=ng Structures

Customs Reform in Afghanistan: Moving Between Introduced and Pre- exis=ng Structures Afghanistan Public Policy Research Organiza<on December 2011

Acknowledgements This paper is a product of a research project funded by Harakat Afghanistan Climate Investment Facility. APPRO expresses its sincere thanks to Harakat for their support and feedback on the various aspects of this research. This research would not have been possible without the aceve parecipaeon and assistance from the many traders and customs officials who were approached by APPRO. APPRO takes full responsibility for all omissions and errors. About the Authors Lead authors for this paper are Saeed Parto (Director of Research) and Ehsan Saadat (Researcher). Ahmad Shaheer Anil (Research and EvaluaEons Manager) managed the fieldwork. Rebecca Gang edited this report. About APPRO Afghanistan Public Policy Research OrganizaEon (APPRO) is an independent social research organizaeon promoeng social and policy learning to benefit development and reconstruceon efforts in Afghanistan. APPRO is registered with the Ministry of Economy (RegistraEon Number: 1212) as a not- for- profit, non- government organizaeon and headquartered in Kabul, Afghanistan. APPRO s mission is to facilitate criecal dialogue on policy and reconstruceon issues. This mission has two components. The first component is to measure development progress against strategic reconstruceon objeceves and provide insights into how to improve performance against the milestones set by the Government of Afghanistan and the internaeonal donors. The second component is to train and mentor a pool of Afghan researchers to conduct research consistent with internaeonally recognized standards for social scienefic research. Research at APPRO is undertaken to address exiseng and pressing knowledge gaps in the policy making process and to advance the learning of researchers, academics, and decision and policy makers at all levels. (c) 2011. Afghanistan Public Policy Research OrganizaEon. Some rights reserved. This publicaeon may be reproduced, stored in a retrieval system or transmi\ed only for non- commercial purposes and with wri\en credit to APPRO and the authors. Where this publicaeon is reproduced, stored or transmi\ed electronically, a link to APPRO s website www.appro.org.af should be provided. Any use of this publicaeon falling outside of these permissions requires prior wri\en permission and can be sought by emailing mail@appro.org.af or by calling +93 700 538 081. i

Table of Contents ExecuEve Summary... 1 1. IntroducEon... 4 2. ObjecEves and Methodology...5 3. Customs Reform Since 2001...6 4. Key findings...9 4.1. Hairatan...11 4.2. Islam Qala...11 4.3. Torkham...12 4.4. Common Challenges...13 5. Conclusion...14 6. RecommendaEons...16 Bibliography... 19 Appendix 1: Customs Reform Programs and Projects... 20 Appendix 2: Customs Clearance Procedures (in English and Dari)... 21 iii

Glossary APPRO ASYCUDA HOO MAIL MoCI MoF MoI UNCTAD UNDP Afghanistan Public Policy Research OrganizaEon Automated System for Customs Data High Office of Oversight and AnEcorrupEon Ministry of Agriculture, IrrigaEon and Livelihood Ministry of Commerce and Industry Ministry of Finance Ministry of Interior United NaEonal Conference on Trade and Development United NaEons Development Programme ii

Execu4ve Summary Afghanistan is highly dependent on imports. A funceonal customs system with minimal or no leakage in duty colleceon can be a reliable and sustainable source of funds for the Government of Afghanistan. Recognizing the importance of a fully funceonal customs system as a source of government revenue, efforts have been made by a long list of internaeonal donors to modernize and systemaeze the customs system in Afghanistan. This research was carried out from February to August 2011 to assess the impact of the changes made since 2001 and to idenefy pathways for future planning and programming in a\empts to insetute a fully funceoning customs system. The raeonale for this research was that further plans to reform the system need to be based on a close examinaeon of what has been accomplished to date and the ideneficaeon of the barriers and bo\lenecks that Afghan traders conenue to face in moving merchandize to and from the border entry points. The research finds that a change of the norms that underlie corrupeon in the customs system requires all manner of measures ranging from procedural adjustments (short term) to increased oversight and enforcement (medium term) to value- based behavioral change among the customs system s officials and traders through awareness raising, educaeon, and a system of inceneves and disinceneves (long term). Failure to a\end to the mule- layered needs of the customs system runs the risk of a general weakening of trust in the system by legiemate naeonal and internaeonal investors who would be either dissuaded from inveseng due to a high level of risk and unpredictability or, if they decide to invest, are likely to tolerate and, by default, help perpetuate corrupt praceces. A net outcome of these trajectories will deprive Afghanistan of desperately needed legiemate trade acevity and direct investment by naeonal and internaeonal investors. The heavily funded mule- donor and mule- year project to build and maintain Afghanistan s customs system is likely to be a slow process. The duty rates have to be thoughkully set to encourage importers to conenue to go through the system rather than outside it. Duty charges need to be enecing enough to keep the importers coming through legal channels so that the Government conenues to collect customs revenue. Once the acceptable threshold for duty levels is passed and the duty is deemed too high by the traders the licit importer is tempted to go through informal / illegal channels, causing revenue losses for the Government. Adequate salaries are but one measure in the overall package of measures that needs to be put together in the reform of the customs system. If it is not possible to increase salaries immediately and sufficiently, other innovaeve inceneves need to be deployed to bring bribery under control through, for example, commission- based bonuses to the customs officials. Other forms of assistance to increase the capacity and capability of customs employees, such as appoineng internaeonal advisors at ports of entry, should be done more thoughkully. 1

There is a need to strengthen law enforcement, yet there has to be recognieon that enforcing the law is omen a funceon of the ability to enforce and a full set of inceneves and disinceneve for those subjected to the law. Consistent law enforcement in the long run is likely to result in changed behavior by the officials and the traders alike. For this to happen, the users of the customs system (customs officials and traders) will have to become part of the solueon by being included n the discourse to address corrupeon. The problems and bo\lenecks in the customs system are less to do with inadequacies in the infrastructure and procedures and more with systemic corrupeon. Changes in informal insetueons such as corrupeon take a long Eme to become established, and will require all manner of inceneve and disinceneve which may be monetary and non- monetary, procedural and regulatory and, most importantly, innovaeve and interaceve to maximize learning by doing. The formalizaeon of the role of komishenkars in the customs system serves as a good example. There is no immediate one- Eme solueon to the bo\lenecks in the customs system and currently there is li\le or no inceneve for the users of the system to change it. Much could be accomplished, however, through reform in wages and/or other forms of remuneraeon, increased and transparent oversight, and, most importantly, engagement and learning with a view to innovate and effect insetueonal change. Key Recommenda,ons - ConEnue the building and modernizaeon of customs infrastructure. At major points of entry, i.e., Hairatan, Islam Qala, and Torkham, Afghanistan s customs system is one of the most a\ended to and modernized in South / Central Asia and the Middle East. Efforts to maintain the current funceons and increase adherence to the procedures through more effeceve enforcement and oversight will need to be intensified, bearing in mind that insetueonalizaeon of the many changes planned for the customs system is likely to take many years. - IniEate a process of dialogue to involve the Ministry of Finance, High Office of Oversight, Ministry of Commerce and Industry, representaeves of traders and other private sector representaeve, and other relevant parees on how to conenue efforts to implement / enforce customs law and related regulaeons and procedures and devise ways of minimizing arbitrariness in the praceces of customs personnel. Intermediary organizaeons, such as Harakat, are well posieoned to inieate such a dialogue. The outcomes from this dialogue should include interveneons to increase the integrity, independence, and authority of the customs system in relaeon to other governmental agencies aceve in border areas. - Maintain efforts to improve infrastructure, provide training and capacity exchange, raise salaries and other forms of remuneraeon, and insetute a funceoning oversight mechanism to include monitoring, evaluaeon, and periodic audits. 2

- Formally cerefy komishenkars as legiemate actors in the customs process while taking steps to ensure that they report on the fees charged and taxes paid on earned commissions. - ConEnue to build cooperaeon and harmonizaeon through customs treaees, for example, with neighboring countries. For this to happen, and for Afghanistan to maximize benefits from such associaeons, Afghanistan needs to address the remaining problems in its customs system (mostly related to corrupeon) simultaneously with strengthening Ees with regional and internaeonal partners. - Conduct further research to understand the back end of customs operaeons. The scope of this research was limited to an examinaeon of the front end of customs operaeons, focusing on how users and officials process goods through the system. To further benefit the design and implementaeon of reforms in the customs system it will be necessary to invesegate, for example, how collected duees are transferred from the border into Government revenue streams, to what use collected revenues are put, and how these aspects of the system affect day to day operaeons at the border point of entry. 3

1. Introduc4on Afghanistan is highly dependent on imports. The customs system plays an instrumental role in both facilitaeng and curtailing transfer of goods between Afghan traders and their customers or suppliers in adjacent countries. In addieon, a funceonal customs system with minimal or no leakage in duty colleceon can be a reliable and sustainable source of funds for the Government of Afghanistan. Recognizing the importance of a fully funceonal customs system as a source of government revenue, efforts have been made by a long list of internaeonal donors to modernize and systemaeze the customs system in Afghanistan. 1 The most recent major effort by the Government and the internaeonal donors in streamlining the customs system is areculated in the Five Year Strategic Plan (2007-2012). 2 The key areas of interveneon include (re- )organizaeon of the customs system s workforce, proteceon of customs system s users, i.e., traders, improvement in infrastructure and equipment, and raeonalizaeon of laws, procedures, and automated processes to minimize contact between customs personnel and other government officers and traders to minimize rent seeking opportuniees and corrupeon. The added advantage of a funceoning customs system is the minimizaeon and control of smuggling goods including narcoecs and hazardous materials. The remainder of this study is structured as follows. The next seceon outlines the objeceves and methodology for this study. SecEon 3 provides an overview of customs reforms to date and idenefies some of the remaining challenges in further improvements to the customs system. SecEon 4 analyzes the data collected from three ports of entry (Hairatan, Islam Qala, and Torkham). Where appropriate, the analysis draws on data from secondary sources including APPRO s other research. SecEons 5 and 6 conclude with recommendaeons for consideraeon by naeonal and internaeonal policy makers involved in customs reform. 1 The list includes Asian Development Bank, DfID, EU Commission, German Government, Italian Government, Iranian Government, Japanese Government, USAID, and the World Bank. 2 Government of Afghanistan (2007). Afghanistan Customs Department (ACD): A Five Year Strategic Plan (2007-2012), (Kabul: Ministry of Finance, Government of Afghanistan). 4

2. Objec4ves and Methodology The goal for this study was to document progress to date and ongoing challenges in the reform of Afghanistan s customs system in order to generate findings and recommendaeons for use in future customs- related policy making and programming. The objeceves for the research were thus to: 1. Document reforms to the customs system since 2001; 2. IdenEfy progress and remaining gaps in customs reform; 3. Pinpoint areas of conenued difficulty for customs system users, including bo\lenecks, duplicaeve or unnecessary processes, and opportuniees for corrupeon; and 4. IdenEfy possible entry points for interveneon to address corrupeon among key private and public sector actors in the customs system. To meet these objeceves researchers completed a desk review of customs- related reform inieaeves in Afghanistan since 2001 and a series of interviews with key, Kabul- based, naeonal and internaeonal stakeholders and experts involved in customs reform. For this study interviews were held with individual traders, brokers (komishenkars), and customs officials at the three border points and Kabul while two focus groups with businesses and a disseminaeon workshop to verify the findings were held in Kabul. This research was carried out from February to August 2011, three years into the implementaeon of the Five Year Strategic Plan. The sites for this research were Torkham, controlling the border with Pakistan, Hairatan, controlling the border with Uzbekistan, and Islam Qala, controlling the border with Iran. Although Afghanistan s automated customs system should operate idenecally across the country, it was assumed that there would be regional and site- specific variaeons. The seleceon of three geographically and ethnically disenct border sites was thus intended to highlight both naeonal and site- specific pa\erns. The study originally planned to embed an APPRO researcher with a consignment of goods to be imported into Afghanistan and then escort the convoy to its desenaeon in order to observe the customs process and in- country transit condieons first- hand. However, this was deemed unsafe in the present security environment and was not fulfilled. To collect data, three teams of two researchers spent two weeks in each border locaeon to observe customs procedures and to conduct interviews with customs and border officials, truck drivers, and komishenkars. Researchers further conducted in- depth interviews with at least ten individual traders at each border locaeon, selected on the basis of their regular use of the border point. 5

3. Customs Reform Since 2001 A funceonal customs system is a reliable and sustainable source for government revenue generaeon. Recognizing this, internaeonal donor programming on the reconstruceon of Afghanistan since 2002 has placed parecular emphasis on improving and expanding customs faciliees and praceces at major border crossing points. In 2003 the customs Department of the Ministry of Finance introduced a Single Administra8ve Document system pilot program, based on the European Union s customs system, in the five key provinces of Kabul, Herat, Kandahar, Balkh, and Nangarhar. 3 In 2005 work began to implement the Automated System for Customs Data (ASYCUDA), which is currently ongoing. The Five Year Master Plan of the Afghan customs Department (Ministry of Finance) reports an esemated total project expenditure of $202 million for strengthening and expanding the customs system. 4 Key areas of interveneon and reform according to this Plan are minimizing leakage in duty colleceon through raeonalizaeon of laws, procedures, and automated processes to facilitate clearance of goods and minimize corrupeon among system users and operators. 5 Two key elements in this reform process are the expressed intent to form partnerships with traders through which to encourage voluntary compliance with laws and, secondly, to improve the internal organizaeon of the customs system focusing on effeceve and efficient structures, logical definieon of roles, fair recruitment system, service condieons, accountability, conduct and disciplinary rules, training support, and built- in mechanisms for the promoeon of ethics among the staff. 6 Other areas of focus highlighted in the Plan include proteceon of customers, interdiceon of dangerous goods, collaboraeon with fiscal audits, colleceon of taxes at source, and expansion of physical structures for customs operaeon. According to the Five Year Strategic Plan, some of the key achievements since 2003 in reforming the customs system include the construceon of infrastructure faciliees at major border points, enactment of a modern customs legislaeon, harmonized system for the classificaeon and coding of goods, development of a single customs Form for customs declaraeons, adopeon of ASYCUDA from UNCTAD, computerizaeon of transit procedures through the phased implementaeon of ASYCUDA commencing in 2005, import- related exempeons policy and procedures, automated data colleceon and produceon of customs staesecs, customs brokers program, and acquisieon of informaeon technology and other equipment and uniforms. 3 Altai ConsulEng. 2007. Challenges Presented by the Legal and Regulatory Framework Governing Private Sector, For- profit AcEvity Background paper prepared for the Enabling Environment Conference, organized by Aga Khan Development Network in August 2007, Kabul, Afghanistan. Also, Department of State (2009), Doing Business in Afghanistan: 2009 Country Commercial Guide for U.S. Companies. (Washington DC: United States Government). 4 ACD. 2007. Afghan Customs Department: A Five Year Strategic Plan (2007-12). (Kabul: Government of Afghanistan). 5 ACD. 2007. Afghan Customs Department. 6 ACD. 2007. Afghan Customs Department. 6

There remain major basic challenges, however, at customs faciliees even at important border points such as Torkham, Islam Qala, and Hairatan. These include lack of electricity and/or generators, or lack of fuel for generators, lack of adequate running water and sanitary faciliees, low salaries of customs staff, and deterioraeng security and the emergence of a parallel, shadow customs system. The use of the new physical infrastructure and buildings being built to serve customs purposes are someemes contested by other governmental bodies such as the border police who also have needs for be\er funceoning physical structures. In addieon to customs officials present at major border entry points are the border police, Ministry of Commerce and Industry (MoCI) which owns much of the land around important customs points and collects duty on selected goods entering the country, Ministry of Interior (MoI) whose funceon is to monitor import of intelligence equipment, Ministry of Culture which vets contents of wri\en and recorded materials entering the country, Ministry of Public Health which checks the standards of imported medical goods, provincial governor s representaeves parecularly in Jalalabad where the Governor s office has staeoned around 20 people who impose a development levy on goods entering from Pakistan, Afghanistan NaEonal Standard Authority which checks the quality of various goods to ensure compliance with internaeonal standards, and Ministry of Agriculture, IrrigaEon and Livestock (MAIL) which checks all imports of agricultural products. Rumors run rife at various border points about widespread corrupeon running through the operaeons of these various eneees and there being li\le or no opportunity for registering complaints or having complaints addressed in a Emely and just manner. There is li\le faith in the ability of the customs system to fulfill its mandate of managing and overseeing the day to day working of the customs and related workforce, ensuring that corrupeon is checked, and that the customs charges are applied consistently, fairly, transparently, and diligently. The implementaeon of ASYCUDA since 2005 has streamlined the customs procedures to four steps, taking an average Eme of around 90 minutes to complete. Part of the ASYCUDA system is a comprehensive list of 6,000 codes for all manner of goods to be entered into the computerized system and for the appropriate fee to be applied. This, together with X- ray faciliees at Torkham and Islam Qala (but not yet at Hairatan) should make for an efficient system of checking cargo and registraeons while applying standardized fees. However, as the findings from this study show, the implementaeon of the ASYCUDA and other projects to structure and modernize the customs system, and the adopeon of legislaeon in accordance with internaeonal praceces must be viewed as the start of a longer process of physical and human capacity development to ensure that the new physical structures and work procedures, technologies, and legislaeon are appropriately allocated, learned, and applied consistently and with effeceve oversight mechanisms. Other deficiencies include lack of adequately trained personnel to collect and analyze customs data and to generate reports to inform further reform and improvements in the system. ConflicEng mandates and/or jurisdiceons of the Ministry of Interior, Ministry of Commerce and Industry and other governmental (and someemes local and non- governmental) eneees also conenue to 7

undermine the speed and effeceveness of the reform process while increasing transaceon costs formally and informally (through various forms of extoreon) for traders. In some cases the customs border personnel do not even have sufficient authority to maintain the use of infrastructure designated for their own use. Regardless of these and other monumental challenges, the customs system has seen a marked improvement in its overall funceonality and ability to collect and transfer revenues to the Government. Customs revenues increased from $50 million in 2004 to more than $399 million in 2008, for example, an increase of more than 700% in five years. 7 For 2011 the esemated revenue from customs operaeons is around one billion dollars US. 8 At their current rates, customs revenues consetute well over half of all Government revenues while the waieng Eme for trucks at major border crossings has decreased significantly. 9 For example, over 90% of trucks at Torkham are cleared in less than 1.5 hours, compared to 18 hours in 2003. 10 The broad goals of the customs reform program are to increase revenue, standardize report generaeon, increase speed in cargo processing, and generate complete documentaeon. (See details of specific programs and projects to meet these and future objeceves in Appendix 1 and customs process descripeons and procedures in Appendix 2). Despite the numerous programs and successes widely publicized by internaeonal donors and the Government in building the customs system in Afghanistan, the view from outside the country and the advice to those wishing to do business in Afghanistan is rather skepecal, caueonary, and contradictory to the stated accomplishments: Although there is a focused Afghan and donor country effort to improve faciliees and praceces at the major border crossing points, the customs regulaeons and procedures in Afghanistan are neither transparent nor consistent. CoordinaEon between customs and other government authoriees is minimal, customs officials receive minimal training, and infrastructure is sell 2 to 3 years from being fully upgraded. Traders face unclear procedures at the borders as well as significant delays, extra- legal duees, and bureaucraec obstruceons. CorrupEon is a significant problem. 11 Also, a US Government invesegaeon in 2010 reports skepecism by a large number of significant actors about the prospect of expeceng the Afghanistan NaEonal Police or Afghanistan NaEonal Army to play central roles in curbing corrupeon in transit of goods from border entry points to various locaeons within the country. This skepecism is based on concerns about capacity, competence, and corrupeon. 12 The underlying reason for such skepecism is not weaknesses in or lack of procedures 7 IDA 2011. InternaEonal Development AssociaEon of the World Bank, available at: h\p://web.worldbank.org/wbsite/ EXTERNAL/EXTABOUTUS/IDA/0,,contentMDK:22311336~menuPK:4752068~pagePK:51236175~piPK:437394~theSitePK: 73154,00.html 8 Customs key informant, Kabul, May 2011. 9 ACD. 2007. Afghan Customs Department. Page 9. 10 IDA. 2011. InternaEonal Development AssociaEon. 11 Department of State. 2009. Doing Business. Chapter 5. 12 Tierney, J.F. 2010. Warlord, Inc.: ExtorEon and CorrupEon Along the US Supply Chain in Afghanistan. (Washington DC: United States Government), page 67. 8

but lack of enforcement coupled with actual or perceived insecurity. Arguably, the most formidable insetueon to contend with in the customs and numerous other systems in Afghanistan is deeply rooted and, in many cases, sophisecated forms of corrupeon compounded by the presence (at border entry points) of a plethora of other governmental eneees with insufficiently clear, or overlapping, mandates. It is worth poineng out that corrupeon in Afghanistan has some of its beginnings in the tradieon of appreciaeng help through offerings of presents and, more recently, money. This tradieon has now evolved into a sophisecated and widespread system of extoreon manifeseng itself in all facets of life in Afghanistan, parecularly in areas where there are significant flows of goods and poteneal cash such as customs. No change in procedures alone can deal with corrupeon in its current state. Procedurally, there are rules to be followed and tools such as ASYCUDA to be uelized. Neither is done adequately or sufficiently, however, due to li\le inceneve to do so and no serious oversight to enforce adherence. Changing or overcoming the informal insetueons of the total Afghan economy, including corrupeon, are much greater challenges than introducing or changing the formal ones, e.g., rules and regulaeons. 4. Key Findings Reportedly, the new and very modern customs system established by the Government of Afghanistan with significant support from the internaeonal donors is the source of envy for all the neighboring countries. However, despite the various faciliees provided by the ASYCUDA system for applying the correct duty, generaeng receipts, and building a very useful database, there are complaints that the pricing departments at border points impose arbitrary codes and prices to the goods entering the country. Traders also complain that ASYCUDA s expansive database is not uelized to assist them with tracking misplaced or lost documentaeon and instead they have to resort to the services of komishenkars to obtain duplicates. The problems of the customs system are mostly to do with widespread corrupeon, lack of clarity among the system s users in relaeon to the fees charged, underuelizaeon of the ASYCUDA technology, and li\le recourse for the users to report maltreatment. Inconsistency in customs duty allocaeon was the main complaint by many of the traders who parecipated in this research: Depending on the point of entry, different rates of duty are applied to the same imports. It is as if the head of customs is the self- appointed Minister of Finance. In Herat the duty for one ton of goods could be 560 Afghanis whereas in Mazar it could be 760. If this is one country with one Ministry of Finance, then the rates should be the same at all entry points. 13 13 Focus Group Discussion, Kabul, April 2011. 9

The senement shared by many of the traders interviewed at the three border points was that they did not mind paying fees on the condieon that there was consistency in the system and the levels charged and that the proceeds would go to the Government, verified through properly prepared documentaeon: We don t mind paying fees, but we prefer it to go through official channels to the Government and not to anyone who has the power to take it from us. 14 The traders interviewed in Kabul and at the three border entry points cited numerous examples of extoreon by senior and other customs officials who allegedly demand a fee depending on the size and type of imported goods. 15 If the trader is willing and able to pay, the consignment passes through the system without delay. If not, the goods are impounded, someemes for up to a month, at the border to wait their turn to be processed. InspecEon of the goods consists of offloading everything from the container truck, inspeceng it with the risk of loss and damage, uploading it (also with the risk of loss and damage), and then allowing the goods to pass through. 16 Smaller bribes are requested throughout the process of inspeceon. According to one trader: This whole system is unfair. When duty rates are decided there is no consultaeon with the traders or their representaeves. No one can solve this problem because a lot of these customs officers have purchased their jobs and are obliged to act in a corrupt manner to recoup their costs. 17 For traders who wish to minimize their discomfort and to go through the customs procedures expedieously, there are komishenkars (brokers or middlemen) who are, allegedly, appointed by the senior officials at customs points. Typically, komishenkars charge between 1,400 1,800 Afghanis per truck, not couneng all other gratuity or bribe monies that the traders are expected to pay the various officials while the komishenkar is going through the process. Traders who go through the process are expected to pay a formal charge of 1,800 Afghanis for the T1 Form and between 200-300 Afghanis for the tashrihnameh (descripeon document). Many traders pay closer to around 6,000 Afghanis and complain that they can only show receipts for some of the costs they incur in coming through the customs system. 18 All allegaeons about extoreon and bribe expectancy by customs and other officials are vehemently denied, however, by MoF officials. 19 The role of komishenkars, though inieally informal, were formalized in June 2011 and even documented in the revised procedures for obtaining customs clearance. (See Appendix 2). 14 Focus Group Discussion, Kabul, April 2011. 15 Reportedly, the normal bribe for trucks is $250 for carrying cement, $110 for Ember, $100 for potatoes, and $90 for petroleum gas. See ADB (2008), Afghanistan s Trade with CAREC Neighbours: Evidence from Surveys of Border Crossing Points in Hairatan and Sher Khan Bandar. (Kabul: Asian Development Bank). Conceivably, high value electric and electronic products would incur higher bribes. 16 Interview with traders at Islam Qala, February 2011. 17 Focus Group Discussion, Kabul, April 2011 18 One trader at Islam Qala claimed that he paid anything ranging from 100 to 20,000 Afghanis depending on the type and size of his cargo. 19 ADB. 2008. Afghanistan s Trade. The interviews held with officials in the course of this study also confirm this. 10

4.1 Hairatan The traders and other key informants interviewed at Hairatan and in Mazar- e Sharif reported paying informal fees (or bribes) of up to 5,000 Afghanis per container truck to get through the first inspeceon point so that the contents can be valued and fees payable calculated. Passage through Mazar- e Sharif also involves the payment of haqul ubor (right of passage) of between 1,800 to 2,000 Afghanis, charged by the municipality. If a trader wishes to pay less in customs charges, it is at this point where negoeaeons begin about the value of the cargo. High value cargos are rouenely undervalued at traders request to minimize payable customs fees. The officer(s) who assist the traders by undervaluing the contents are given a share of the savings made through contents being undervalued. According to one trader, On this side of the border [in Afghanistan] we are requested to pay bribes by the customs people and the [border] police, who are just looking for an excuse. Even when we have no problems with our paperwork, we are told that since we are imporeng so much we should give them a li\le as their share. 20 Bribes are also willingly paid by traders who want their cargo moved quickly through customs: Once I am in Afghanistan, I offer to pay bribes because I know that I can speed up the process, and get my goods to their desenaeon within one or two days. 21 In contrast, there are very few problems with bribery and loss of goods while goods transit through Uzbekistan and Tajikistan on their way to Hairatan. All traders were adamant that problems for shipments begin from the point of entry into Afghanistan. The only situaeon where there is a possibility of bribe payment outside of Afghanistan is when transit paperwork is incomplete or inadequately administered. 4.2 Islam Qala Traders in Islam Qala report various excuses used by officials to extort bribes from the traders for amounts ranging from 100 to 20,000 or more Afghanis. 22 The traders who import vehicles and decide to drive them to Kabul for registraeon are harassed by officials for not having plates despite the fact that the documentaeon for the vehicles is in order. This situaeon is omen resolved through the payment of bribes. Traders are charged 1,800 Afghanis for obtaining the T1 Form and 2-300 Afghanis for obtaining tashrihnameh. However, with various types of other unofficial charges and the use of komishenkars, the traders typically pay around 6,000 Afghanis to have their importaeon paperwork completed. 20 Interview with a trader in Mazar- e Sharif, February 2011. 21 Interview with a trader in Hairatan, February 2011. 22 Interviews with traders in Islam Qala, February 2011. 11

The route from Herat to Kabul is parecularly unsafe and, reportedly, there are official and unofficial checkpoints to collect illegal right of passage fees from the trucks. Unofficial right of passage fees are also charged on cargo coming from Islam Qala to Herat. As one trader put it, If you travel 5 kilometers away from Islam Qala toward Herat, you see all these people standing on the road with their shalwar chemise clothing and asking for money. They have no right to do this, only power to extort money. 23 Some of these checkpoints even issue their own receipts to the drivers while many drivers insist on paying and obtaining the receipts to insure themselves the right of passage through further checkpoints or for when they return on the same route. Goods entering into Afghanistan through Zaranj also pay a fee at the Delaram T- junceon where the Taliban have a checkpoint and charge a duty based on the number of Eres on the trucks. The usual price is 1,000 Afghanis per Ere. 24 A number of the traders interviewed expressed a wish for insurance cover for their goods while en route from Islam Qala to Kabul. 4.3 Torkham The traders interviewed reported on irregular applicaeon of customs duty. They pay 16,500 Afghanis, which includes a fee for the komishenkar, to obtain a T1 Form to import goods and 1,000 Afghanis to the provincial government as development fee. On compleeon of the paperwork the traders are expected to give about 100 Afghanis to the processing officer as bakhshish (gratuity). The main objeceon by the traders using Torkham as their entry port was not receiving receipts or being given inadequate documentaeon explaining the charges and the reasons for them. In addieon to inconsistent duty being applied, other costs incurred by traders include a development charge in Torkham, imposed by the Governor s office for right of passage through the Jalalabad municipality, and informal fees charged at the various entry points to Kabul. En route to Kabul, trucks are omen stopped by the police and asked to pay, as passage fee, the unofficial cigare\e and snuff money which ranges from 30 to 200 Afghanis. There are a number of significant issues faced by the traders who transit through Pakistan entering Afghanistan via Torkham, parecularly en route from the port of Karachi. 25 Goods that remain in Karachi because of insufficient documentaeon or because of high bribes sought by Pakistani customs officials, have to pay storage fees, or demerge, which someemes can be as high as one to 1.5 million Kaldars. Also, recently the Government of Pakistan set up a government owned and operated 23 Interview with a trader in Hairatan, February 2011. 24 Interview with traders in Islam Qala (February 2011) and with a customs official in Kabul (June 2011). 25 Note that none of the key informants, interviewed for this research, alluded to problems with transieng their goods through Uzbekistan or Iran. 12

transportaeon company, NLC, tasked with the transportaeon of in transit goods desened for Afghanistan from Karachi. The Afghan traders are no longer allowed to arrange their own in transit and are compelled to use NLC. Reportedly NLC does not have sufficient trucks to accommodate the high volume of in transit goods desened for Afghanistan. Also, the trains used for transporeng the in transit goods cannot accommodate heavy items such as cars and other heavy vehicles. This results in increased delay in the movement of imports from Karachi to Torkham and payment of muleple storage fee costs. 26 The amount of imported goods into Afghanistan, parecularly of electrical and electronic goods, far exceeds the domesec demand. The reason for this is the lucraeve and informal re- exportaeon system in operaeon around Torkham, which takes advantage of the high duees charged on imported goods in Pakistan. Significant volumes of electrical and electronic goods, clothes, DVDs, CDs, tea, and drugs imported into Afghanistan through Torkham are re- exported back to Pakistan through border villages such as Garoko, Durbaba, and Shalman and sold at premium prices. 27 The amount of illegally imported goods into Afghanistan is esemated at 20% of the total. The entry ports for illegal importaeon are Lalpoora, Gowshta, Garoky, Kama, Chachobi, and Achin. 28 4.4 Common Challenges Geng through the customs is the first of a series of challenges faced by traders who then have to move their goods to Kabul. From all three border points to Kabul there are layers of police checkpoints who, reportedly, demand a fee to allow the trucks to conenue on to Kabul. When entering Kabul, an informal fee is paid to the traffic police to gain permission for transieng heavy loads. If fines are imposed on truck drivers while in Kabul, receipts are not always provided. 29 When in Kabul, the trucks are impounded in designated storage areas as a means to lessen the level of traffic in the city. For each night of impoundment the trucks have to pay around 250 Afghanis each, which amounts to a small fortune considering that around 3,000 5,000 trucks enter Kabul every day. 30 The traders who have their own storage faciliees are legally not allowed to use them instead of the designated storage areas. In addieon to the bribes payable by the traders, traders face other major challenges. As one key informant put it, there is no insurance system in our country. This is a serious problem for us [given the security risks]. Afghan traders are not realizing their full poteneal for a number of very important reasons. 26 Interviews with traders in Torkham (February 2011). 27 Interview with traders and customs officials in Torkham (February 2011) and interview with customs official in Kabul (June 2011). 28 Interview with customs officials in Torkham (February 2011). 29 Interview with traders in Torkham, February 2011. 30 Focus Group Discussion parecipant, Kabul, April 2011. 13

Outside Afghanistan they have visa problems and difficulty in negoeaeng with foreign traders because we [Afghan traders] have very li\le experience of working in internaeonal markets and we don t have appropriate knowledge and educaeon about trade. Another issue is the inadequacy in how the Government charges its various fees. For example, there are muleple charges imposed on many imported goods. First, there is a charge at the port of entry and then at the end of the year there is another charge imposed by the Ministry of Finance [as tax]. Our traders are not clear as to why they are paying these charges. 31 The losses incurred by the traders when their perishables are spoiled during retaliatory inspeceons by customs officers are significant. This creates an areficial growth barrier for many traders who are risk averse and shy away from trading in large volumes for fear of paying higher bribes or having their goods stolen at various points of the journey from the border to Kabul. Other traders opt for sub- quality imports to minimize risks. A significant factor to be considered in resolving the high level of corrupeon in the customs system is the very low salaries of the customs system employees. 32 Rumors are rife about customs jobs being sold and excessive corrupeon taking hold as the means to extort money and pay for the debt incurred to buy a customs job. Even when all paperwork is in order, the traders are asked to pay something since they are carrying significant amounts of cargo and, presumably, have access to lots of money. Some of the customs personnel interviewed reported that it was difficult for honest personnel to remain honest since they were surrounded by peers and superiors who forced them to be corrupt. Reportedly the consequence of not succumbing to peer pressure is omen dismissal. 5. Conclusion In technical terms, Afghanistan s new automated customs system (ASYCUDA) is the envy of the region. However, despite new faciliees, improved infrastructure and a\empts to build capacity and accountability among customs officials, the customs system conenues to exhibit exceedingly high levels of corrupeon. While corrupeon in Afghanistan may have its roots in the tradieon of offering monetary gratuiees or in kind appreciaeon in exchange for services, this tradieon has evolved into a sophisecated and widespread system of extoreon manifest in almost all facets of life. These praceces are parecularly evident where there is a significant flow of goods and cash, as in the customs system. 31 Interview with an official from Afghanistan Chamber of Commerce and Industry. 32 This is part of a much larger, naeonal issue with low wages aceng as inceneves for corrupt behavior. While simply raising salaries of all government employees by a factor of 5 or 10 is not a realisec opeon, the issue remains that as long as salaries remain at their current levels, there is a high likelihood that they will conenue to act as a major inceneve for taking bribes or extoreon. 14

Customs officials commonly take advantage of traders, demanding bribes of varying sizes in exchange for the performance of nearly any funceon. Customs employees report that even when they do not want to parecipate in corrupeon and extoreon, they are forced to do so under peer pressure and due to fear of persecueon by their corrupt colleagues and superiors. As a result, few customs employees speak out against the corrupt praceces of their colleagues. 33 This state of affairs has a negaeve impact on trade and state revenues, increases risks for traders, and thus hinders economic growth. Yet, traders act as both vicems and perpetrators in the current system. Traders play an instrumental role in maintaining a stable, but illicit equilibrium with customs officials, based on payment of minimal fees (by the traders) and receipt of maximum gratuiees / bribes (by the customs officials). This equilibrium is maintained through the subversion of procedural changes introduced since 2003 by, for example, inteneonally miscoding goods in the ASYCUDA system to charge lower duees. The main losses caused by this extra- legal equilibrium are accrued to the government, which fails to receive duees on imported merchandise. DeterioraEng security condieons notwithstanding, the volume of trade between Afghanistan and its neighbors, and thus customs revenue, is likely to increase in the coming years. InternaEonal donors are likely to conenue programming on customs reconstruceon / reform. Efforts by the Government to enter into regional trade agreements and to join the World Trade OrganizaEon are likely to increase the pressure to Eghten the controls in the customs system and root out corrupeon. Regional integraeon and rooeng out corrupeon are, arguably, inemately interrelated but realizing them is not a linear process. Less corrupeon is likely to increase the chances of regional integraeon and WTO accession while regional integraeon is likely to bear pressure to root out corrupeon. From a policy / interveneon perspeceve, both objeceves should be pursued simultaneously. Given the poteneal of the customs system as a reliable and sustainable revenue source, further improvements in the customs system are likely to be inieated and implemented by the Government of Afghanistan and the internaeonal donors. As users of the system, the traders and various other private sector eneees have li\le or no inceneve to advocate for transparency, oversight, or accountability since their border transaceons occur through a stable equilibrium maintained between corrupt customs officials and corrupt imporeng traders. At the same Eme, the government and the internaeonal donors are not in the strongest posieon to effect change in the immediate term. Structural reform of the customs system to root out corrupeon requires input from the government and the donors on the one hand and input from the business community on the other. Breaking the current stable equilibrium to establish a new, more legiemate, equilibrium will require simultaneous interveneon from the top, by the government and internaeonal donors, and from a grassroots level by the business community. In the first instance, top down reform should be 33 Interviews with customs officials in Torkham, February 2011. 15

a\empted through the Government and its intervening agencies such as the High Office of Oversight and AnEcorrupEon and the A\orney General Office. For HOO to succeed where GIAA failed, much more authority and resources will be required to enable HOO to contend, contest, and challenge the current status quo in customs operaeons. Similarly, for the A\orney General Office to play a role in rooeng out corrupeon in the customs system, serious thought must be given to how the Office s role is being fulfilled currently, how successful it has been in bringing to prosecueon corrupt officials of the customs Department, and what can be done to strengthen A\orney General s important funceon. Grassroots interveneons are much harder to inieate and organize but extremely necessary in fundamental reform. One cannot hope or expect that one day Afghan traders will, on their own, decide against being party to corrupeon in the customs system they have no inceneve to do so. The task of inieaeon thus must fall on intermediary organizaeons and eneees with resources and an interest in and mandate for private sector development. Such organizaeons include Harakat, which has a mandate to promote private sector acevity in Afghanistan and also has adequate resources to inieate and facilitate a series of dialogues involving other intermediary organizaeons and eneees such as ACCI, AISA, and etehadias (guilds or trade associaeons). 34 6. Recommenda4ons Changes in informal insetueons such as corrupeon take a long Eme to become established, and will require all manner of interveneon, inceneve, and disinceneve which may be monetary and non- monetary, procedural and regulatory and, most importantly, innovaeve and interaceve to maximize learning by doing. There is no immediate one- Eme solueon to the bo\lenecks in the customs system. The steps required to move away from current praceces involves procedural revisions (short term), improved oversight mechanisms and implementaeon (medium term), and a shim in the values that currently support corrupeon among customs officials and users through awareness raising, educaeon, and redefined inceneves and disinceneves (long term). Such changes cannot be expected to come only from the top down, however. Curbing bribery at the operaeonal level requires dedicated enforcement mechanisms and administraeve sanceons supported at the grassroots level. In addieon, such mechanisms need to be extended and maintained in the provinces. Reforms must also address the needs and interests of the actors most affected by customs praceces customs officials and the traders. IncenEves to inieate behavioral change among corrupt officials should include salaries that surpass basic subsistence. If this is not immediately possible or sustainable, innovaeve inceneves are required to bring corrupeon under control. For example, one customs official suggested that when contraband is intercepted, up to 20% of the value of the seized 34 For the full mandate and operaeons of Harakat, see: h\p://www.harakat.af/index.php?page=en_about+us 16

goods should be given as reward to the employee or the team responsible for the catch. This type of inceneve provides a merit- based bonus to poorly paid customs officials while public disbursement is likely to be noeced by coworkers. Other inieaeves to improve capacity and accountability must be planned with more forethought such as legiemizing the role of komishenkars and pung in place, when necessary, internaeonal advisors with the requisite experience. 35 At the same Eme, inceneves must be designed to target traders, with an understanding that many traders also benefit from corrupeon. With this in mind, duty rates should be set through a consultaeve process to encourage importers to use the system rather than subvert it. Traders must be able to easily and confideneally report instances of corrupeon, and to immediately see the impact of their efforts. Mechanisms for the appeal of customs- related decisions should be relocated to the border points since requiring traders to take their claims to the Customs Appeal Board in Kabul only encourages paying bribes at border entry points to minimize transaceon costs. Failure to address the muleple layers of required change in a systemaec manner runs the risk of undermining state revenues, regional and internaeonal economic integraeon, and is likely to further weaken the legiemacy of the customs system by discouraging legiemate investors and rewarding those engaged in subvereng the system. The net result of these trajectories will be to deprive Afghanistan of desperately needed legiemate trade acevity, government revenue, and direct investment by naeonal and internaeonal actors. AddiEonally, changes of rules and regulaeons will not be helpful unless the issues of enforcement are solved and the perpetuaeon of the culture of offering gratuiees to get things done is managed within acceptable limits. That said, much could be accomplished through reform in wages and other forms of remuneraeon, increased and transparent oversight, and, most importantly, engagement and learning. Specifically, the Government of Afghanistan and internaeonal donors should consider implemeneng the following measures in their efforts to reform the customs system: - ConEnue the building and modernizaeon of customs infrastructure. At major points of entry, i.e., Hairatan, Islam Qala, and Torkham, Afghanistan s customs system is one of the most a\ended to and modernized in South / Central Asia and the Middle East. Efforts to maintain the current funceons and increase adherence to the procedures through more effeceve enforcement and oversight will need to be intensified, bearing in mind that insetueonalizaeon of the many changes planned for the customs system is likely to take many years. - IniEate a process of dialogue to involve the Ministry of Finance, High Office of Oversight, Ministry 35 One customs official complained that appoineng young female Europeans as advisors to customs officials was counterproduceve, parecularly in some of the more conservaeve border regions. The suggeseon was to appoint older males with regional experience to maximize impact on the local customs officials. 17

of Commerce and Industry, representaeves of traders and other private sector representaeve, and other relevant parees on how to conenue efforts to implement / enforce customs law and related regulaeons and procedures and devise ways of minimizing arbitrariness in the praceces of customs personnel. Intermediary organizaeons, such as Harakat, are well posieoned to inieate such a dialogue. The outcomes from this dialogue should include interveneons to increase the integrity, independence, and authority of the customs system in relaeon to other governmental agencies aceve in border areas. - Maintain efforts to improve infrastructure, provide training and capacity exchange, raise salaries and other forms of remuneraeon, and insetute a funceoning oversight mechanism to include monitoring, evaluaeon, and periodic audits. - Formally cerefy komishenkars as legiemate actors in the customs process while taking steps to ensure that they report on the fees charged and taxes paid on earned commissions. - ConEnue to build cooperaeon and harmonizaeon through customs treaees, for example, with neighboring countries. For this to happen, and for Afghanistan to maximize benefits from such associaeons, Afghanistan needs to address the remaining problems in its customs system (mostly related to corrupeon) simultaneously with strengthening Ees with regional and internaeonal partners. - Conduct further research to understand the back end of customs operaeons. The scope of this research was limited to an examinaeon of the front end of customs operaeons, focusing on how users and officials process goods through the system. To further benefit the design and implementaeon of reforms in the customs system it will be necessary to invesegate, for example, how collected duees are transferred from the border into Government revenue streams, to what use collected revenues are put, and how these aspects of the system affect day to day operaeons at the border point of entry. 46 See, for example, Box 1 and 2 regarding ICC standards for businesses and naeonal governments, as well as Appendix 1 for the Global Compact s 10 th Principle. 18

Bibliography ACD (2007). Afghan customs Department: A Five Year Strategic Plan (2007-12). (Kabul: Government of Afghanistan). ADB (2008), Afghanistan s Trade with CAREC Neighbours: Evidence from Surveys of Border Crossing Points in Hairatan and Sher Khan Bandar. (Kabul: Asian Development Bank). Altai ConsulEng (2007). Challenges Presented by the Legal and Regulatory Framework Governing Private Sector, For- profit AcEvity Background paper prepared for the Enabling Environment Conference, organized by Aga Khan Development Network in August 2007, Kabul, Afghanistan. Department of State (2009). Doing Business in Afghanistan: 2009 Country Commercial Guide for U.S. Companies. (Washington DC: United States Government). Government of Afghanistan (2007). Afghanistan customs Department (ACD): A Five Year Strategic Plan (2007-2012), (Kabul: Ministry of Finance, Government of Afghanistan). IDA (2011). InternaEonal Development AssociaEon of the World Bank, available at: h\p:// web.worldbank.org/wbsite/external/extaboutus/ida/0,,contentmdk: 22311336~menuPK:4752068~pagePK:51236175~piPK:437394~theSitePK:73154,00.html Integrity Watch Afghanistan, Afghan PercepEons and Experiences of CorrupEon: A NaEonal Survey 2010. (Kabul: Integrity Watch Afghanistan). Tierney, J.F. (2010). Warlord, Inc.: ExtorEon and CorrupEon Along the US Supply Chain in Afghanistan. (Washington DC: United States Government). 19

Appendix 1: Customs Reform Programs and Projects Program Program 1 Automa,on Projects Project 1: Implementa1on of Transit and Declara1on Processing at Major customs Sta1ons Project 2: Full Implementa1on of all ASYCUDA Modules Project 3: Training for Opera1ons Project 4: MIS and other Revenue Repor1ng Systems of ASYCUDA Project 5: Full Interna1onaliza1on Project 6: Procurement of Necessary ASYCUDA IT Equipment Project 7: Cross- border Data Exchange Project 8: ACD s ICT Master Plan Project 9: Establishment of Risk Management Unit Program 2 Project 1: Legisla1ve Reform Legaliza,on and Project 2: Finalizing Sub- legisla1on Procedures Project 3: Procedures for Suppor1ng Automa1on Project 4: Checking Revenue Leakages and Tax Fraud Project 5: Reform of Internal Audit Directorate Project 6: Formula1on of Effec1ve Valua1on Database Project 7: Implementa1on of Valua1on Best Prac1ces Project 8: Transit Corridors Improvement Project 9: Development of Warehousing Procedures and System Project 10: customs Brokers Program Project 11: Reform Policy and Coordina1on Program 3 Enforcement and Voluntary Compliance Program 4 Human Resource and Organiza,on Development Program 5 Infrastructure and Equipment Project 1: Preven1ve and Enforcement Wing Reforms Project 2: An1- smuggling Reforms with a Focus on Contrabands Project 3: Inves1ga1ons and Prosecu1on Wing Project 4: Borderline Surveillance Project 5: Establishment of a Modern Intelligence Unit Project 1: Salary System Reform Project 2: Incen1ves/Bonuses/Rewards Reform Project 3: Human Resources Policy Reform Project 4: Internal Affairs and Integrity Project 5: Establishment of New Support Units Project 6: Training Policy and Training Schedule Project 7: Modern customs Training Ins1tute Project 8: Train the Trainers Project 9: Refresher and Specialized Training Courses Project 10: Foreign Training Program Project 11: Human Resources Funding Project 12: Human Capital Development Management Capacity Building Project 1: Construc1on or Development of ICDs and Regional Headquarters Project 2: Construc1on or Development of Border Sta1ons and customs Training Ins1tute Project 3: Establishment of Inventory Management and Maintenance Unit Project 4: Establishment of Infrastructure Management Unit Project 5: Establishment of Structure for Cargo Handling Project 6: Surveillance Equipment Program 6 Project 1: Establishment of Legal / Li1ga1on Support Office Legal Reform Project 2: Establishment of Support Appeals and Arbitra1on Unit Program 7 Project 1: Help Line and Media Coordina1on Unit at ACD Headquarters Business Project 2: Website Development Partnership Project 3: Establishment of an Ombudsman Program and Increased Capacity of Consulta1ve Council (with Trade) Project 4: Establishment of a Hot Line at ACD Headquarters Source: Afghanistan s Customs Department (2007). 20

Appendix 2: Customs Clearance Procedures (in English and Dari) Source: Customs officials 21

Source: Customs officials 22