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The potential of the blockchain for Customs

The benefits of blockchain technology range from saving time and money to making documents more secure, further enhanced by encryption and sharing data across the network. Blockchain technology represents an advancement for Customs in that it offers many possibilities ranging from accurate data collection to automatic fraud detection and automatic duty and tax collection.

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Blockchain is characterized by its decentralized structure in a given computerized network: no single entity has the authority to administer the network and to monitor, control and validate all transactions taking place between network participants. Another term used to characterize blockchain technology is the notion of “smart contract”: it is a computer protocol that allows contracts to be executed without the participation of third parties.

Blockchain has the potential to bring about a revolution in international trade that is expected to be as radical and on an even larger scale than the sea container standardization that began in the 1960s. This article focuses on two initiatives. The first, launched by MAERSK and IBM, aims to create a platform for the digitization of trade. The second is to establish an “information superhighway” as part of the Global Trade Connectivity Network (GTCN). We will also discuss the cases of DB Schenker against counterfeiting and the French customs prototype.

These initiatives are just two examples of a myriad of other efforts being undertaken around the world by commercial and transportation companies. In this regard, there is no doubt that blockchain will soon become part of the customs landscape. How will this impact customs administrations?

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Impact of the blockchain on customs

The blockchain can undoubtedly trigger a profound and radical change in the international trade landscape. First, trade-related applications based on digital ledger technology would help reduce the huge volumes of paper documents and multiple bureaucratic interventions that are considered necessary for the conduct of legitimate trade.

In addition, blockchain case studies, initially launched in the financial services sector, have been extended to the fields of transportation or ‘physical’ goods flows, in the wake of the digitization not only of financial instruments but also of traditional trade and shipping documents.
With blockchain technology, customs and other border services could significantly enhance their ability to analyze and target risks, thus contributing to increased trade facilitation.

Customs would be able to automatically extract information from primary sources for declaration processing, thereby enhancing the accuracy, quality and immutability of data submitted. By reducing the burden of manual verification and the resources required to validate declarations, blockchain would help speed up the processing of customs declarations and, at the same time, reduce end-to-end delivery times.

In practical terms, blockchain technology could be integrated into customs practices through a common platform, which would encompass commercial entities involved in trade (such as banks, shipping lines, freight forwarders, customs agents, for example), as long as they are regularly involved in trade, and which would allow information to be shared between all these parties.

By participating in the network as a node, Customs could automatically clear goods that have been ‘pre-screened’ by other Customs on its register at a previous stage, without even having to hold the goods at the time of declaration. In other words, customs could redirect its limited resources to processing a category of trade involving traders and financiers considered ‘outside’ the given public-private partnership framework.

Benefits for merchants on day-to-day business operations

FT looked at the impact of blockchain on commerce, noting, “It records transactions in successive blocks, creating encrypted data that can be shared between multiple parties along the supply chain, keeping information up to date instantly without the risk of fraud.”

Suppose a seller (exporter) and a buyer (importer) agree on a particular international trade transaction: the seller wants to be sure that the buyer will honor its payment obligations, and the buyer wants to pay as late as possible and only after the seller has fully discharged its obligations. Both parties are likely to be able to achieve their respective goals through a smart contract, among other things, thanks to the self-execution function that is expected to be built into commercial applications of the blockchain.

By including banks (as trade finance partners) and distributors (shipping companies, freight forwarders), manufacturers (sellers) will be able to demonstrate that they have agreed to receive the goods ordered, providing customers (buyers) with the assurance that shipments will arrive on time.

Blockchain initiative by Maersk-IBM

Maersk, a Danish shipping company, and IBM are now collaborating to maximize the potential of blockchain in an effort to digitize global trade. Maersk hopes that blockchain will also enable regulators, including Dutch Customs and the U.S. Department of Homeland Security, to closely track the flow of goods, conduct risk assessment effectively and complete regulatory processes efficiently.

The global trade digitization platform the two companies are working on, using blockchain technology, will most likely also leverage the potential of other open source cloud-based technologies, including artificial intelligence, the Internet of Things (IoT) and data analytics, to ensure the traceability of goods traded across borders.

The platform will initially have two core functionalities: a ‘shipping information pipeline’, ensuring end-to-end supply chain visibility, and a ‘paperless trade’ component through the digitization and computerized archiving of all trade paperwork.

In terms of visibility, the digital infrastructure linking multiple participants in a supply chain ecosystem will enable the real-time tracking of containerized shipments through the supply chain. Participants will therefore be able to be informed at any time of the location of a container in transit and check the status of customs documents, while viewing data on the bill of lading and other shipping documents. Blockchain technology will ensure that no party can change, delete or attach any entry without the consent of the other parties in the network.

DP World Australia and DB Schenker: against counterfeiting

Two logistics and supply chain giants, container port and supply chain operator DP World Australia and DB Schenker, have formed a consortium that uses the blockchain architecture developed by Australian-based blockchain startup TBSx3 to combat international counterfeiting and simultaneously protect global supply chains. The ultimate goal of this initiative is to help companies restore consumer confidence in supply chains.

Hamburg Süd, another container shipping company, has also joined the project. Supply Chain Dive reports, “For a while, Maersk had positioned itself as a pioneer of new technologies in ocean shipping through its blockchain alliance with IBM. Even though Maersk owns Hamburg Süd, the launch of another blockchain initiative is a harbinger of a wave of change within the industry.”

Use cases in Singapore

On the trade finance front, the Monetary Authority of Singapore and its Hong Kong counterpart are currently working together to jointly develop the Global Trade Connectivity Network (GTCN), which will enable the cross-border exchange of digital trade data through distributed ledger technology.

To begin with, the project will connect the GTCN to Singapore’s National Trade Platform and the Hong Kong Trade Finance Platform with the aim of building an ‘information superhighway’ between the two platforms. Further connections with platforms in other jurisdictions and communities (such as Japan, South China via Shenzhen, Thailand soon) will be launched in the near future.

In addition, Bank of Tokyo-Mitsubishi UFJ (renamed MUFG Bank in April 2018), one of Japan’s largest financial services institutions, and NTT Data Corporation, one of Japan’s leading systems integration companies, have launched their proof-of-concept pilot project, which will link Singapore’s NTP to the blockchain-based trading platform prototype to be developed by a consortium of Japanese companies.

By integrating digital platforms between these two major trading nations through application program interfaces (APIs), the pilot will aim to provide digital solutions to technical challenges commonly encountered in international trade, including differences in regulations and (different) standards for documentary obligations. One of the expected results is that cross-border trade between the two countries will be almost entirely paperless.

The pilot aims to make cross-border flows more secure, efficient and transparent, with the long-term objective of promoting increased trade and supply chain integration in the region.

Revenue and cooperation between customs and tax administrations

In the area of value-added tax (VAT), bockchain technology could give tax authorities enough ammunition to reduce the gap between expected and actual revenue collection that would result from taxpayers’ attempts to evade or avoid tax.

According to the opinion of PwC UK experts in the discussions on the impact of the technology, “the blockchain makes it much easier to detect fraud and errors because the system provides clear and transparent information about transactions and items in the network”; “it could therefore be particularly useful in tracing VAT to determine whether or not it has been paid, and thus reduce VAT fraud.” However, such a step forward would go virtually unnoticed in the real world of taxation, according to one expert, who adds that to achieve such a goal, “A tax authority … would have to get information from every taxpayer. It would be a huge change to require all traders with a VAT number in the country to submit digital data, including those who do not have a computer and keep their receipts in a plastic bag.

Once data on certain transactions between an exporter (seller) and importer (buyer) are recorded in the blockchain and thus become accessible to customs, the customs administration in the importing country, for example, could cross-check the importer’s declaration with relevant data that can be drawn from the network involving both parties. If these transactions were covered by self-executing smart contracts, the importer’s purchase of the goods, which is only completed when the funds covering the value of the goods are paid to the exporter (i.e., when the money transfer is completed), could be followed automatically by the payment of duties when the goods are cleared.

Finally, common and distributed registry applications could transform existing or planned mechanisms for reliable, real-time information exchange between customs and other competent authorities, thereby enhancing the ability of customs administrations to detect fraudulent practices. The technology could potentially be applied to the exchange of information between customs and tax authorities to ensure a more harmonized approach to revenue collection. Such an application would address the issues of customs valuation and transfer pricing, specifically providing the ability for customs to better assess the veracity of import or export declarations, and to reject, where appropriate, the “price actually paid” (as declared) in order to apply alternative customs valuation methods in cases involving a transfer of profits.

What about the French customs?

In its role of supporting companies’ activities and in order to accelerate its digital transformation, the DGDDI (Direction Générale des Douanes et Droits Indirects) called on the teams of a digital transformation consulting firm to analyze the innovation potential of blockchain technology. The support took place over 6 months, including 3 months of experimentation (development and deployment) in continuous improvement carried out in collaboration with Michelin.

During the period from February 15 to March 31, 2019, Customs, in partnership with Michelin and their customs service provider BDP International, experimented with a tool for tracking entries related to the special inward processing regime based on blockchain technology.

Inward processing (IP) allows EU manufacturers to process raw materials or semi-finished products imported into the EU for re-export without paying customs duties or VAT on the goods used.

Michelin has an IP authorization for all retreading operations at the Bourges site. During the trial, Michelin and BDP International entered some 300 entries corresponding to the life of the goods covered by this authorization.

The prototype enables the continuous and unforgeable recording of events from logistical and industrial processes (arrival of goods and placement under the regime, movements, transformations, exit of goods, etc.). As the blockchain’s registry, in this case private, offers a view of the data that is shared among its users, customs and the operator benefit from real-time monitoring dashboards, allowing for immediate and simple data auditing. This operation was designed to replace the regular transmission of records to Customs.

This approach has demonstrated the undeniable interest of using tools to manage active improvement (time saving, visual monitoring, alerts, etc.) and the use of the blockchain for this purpose has proven to be suitable. However, to take full advantage of the added value of the technology, it would be necessary to go further in the experimentation, for example, by connecting the tool to an operator’s information system in order to access more precise tracking of goods and better traceability. To follow up on this work, a detailed study was carried out in order to estimate the work needed to mature the prototype into a tool that could be offered to all operators.

But then, the team, including the project manager in charge of the Blockchain within the DGGDI has been reassigned – in December 2020 – to another position within the Ministry … of Health!