Under-the-Table Fees Damage Country’s Image

In the back of Rehab Craft Cambodia’s Tuol Kok district office, several disabled men carefully chisel pieces of wood into home decorations.

Up the stairs, more disabled men and women sew silk hand bags that the nonprofit organization hopes to export.

Rehab Craft’s 60 employees, all disabled, make a base salary of $30 per month, plus a commission for each piece they produce. The average salary, said Marin Yann, the director, is $70 per month.

“I’d like more money to go to their salary, but corruption eats up costs,” Marin Yann, a Cambodian-American, said in a recent interview. “When the government talks about reducing poverty, they never talk about corruption.”

Rehab Craft, like so many other businesses, has trouble getting its exports cleared by the Customs Department and obtaining a Certificate of Origin from the Ministry of Commerce’s trade preferences system department —a document required to take advantage of zero or reduced tariffs to the US, European Union, Japan, South Korea and others. Paperwork and technicalities take hours to process and bribes drain the organization of money that could go to the workers.

“There are too many hidden fees,” Marin Yann said. “Customs is the hardest part, and could potentially bring down the business.”

For businesses and NGOs, the Customs Department and the Ministry of Commerce—especially the trade preferences system department and CamControl, a department that inspects goods for quality—are notorious for collecting hidden fees to clear goods entering and leaving the country.

“Bureaucratic delays are commonplace and corruption is a rampant problem,” according to An Investment Guide to Cambodia, a publication released in late 2003 by the UN and the International Chamber of Commerce, a global business organization. “All of these significantly increase the cost of doing business in the country.”

Garment factories, responsible for more than 90 percent of the country’s exports, typically hire brokers to clear goods from CamControl, trade preferences and Customs. In order to smooth the  export documentation process, the Commerce Ministry invited The Garment Manufacturers Association in Cambodia to monitor the process in 2002.

While shippers say the monitoring system has improved the flow of documents and relieved the amount of the payments, they also said under-the-table payments have become institutionalized.

“Corruption is very bad,” said Bun Soeung, a document monitor working for GMAC stationed in the Ministry of Commerce.

While the amount of under-the-table payments vary, he said, Certificates of Origin can typically be had for $30. Payment for inspections are negotiated with the officer.

Companies with links to “senior officials” pay less for inspections, Bun Soeung said, adding: “Inspectors are afraid to ask them for more money.”

The assistant manager of a prominent shipping company contacted this week said that “many, many” payments are made to Customs and Ministry of Commerce officials in the import-export process for everything from getting officials to inspect their goods to signing key documents.

“We make many payments that have no receipts,” the manager said, refusing to be named because the amount of the payments “depends on your relationship with the inspectors.”

The petty corruption was so institutionalized, the manager said, that the payments “aren’t really under the table.” When the shipping company bills its clients, mostly garment factories, it wraps up all the informal payments under the single line item “Customs Clearance.”

A senior CamControl official, speaking on condition of anonymity because he was afraid of losing his job, said the payments were “some small thing to sustain the life of the inspectors.” He defended his organization, saying it was a small fish in the import-export sea, and that Customs officials, soldiers, police and port authorities were all caught up in a “bad environment.”

An official in the trade preferences department, which inspects goods before it issues a Certificate of Origin, said that money regularly exchanges hands during the inspections, but he saw nothing wrong with it.

“It’s not bribery, it’s more like sympathy,” he said, adding that inspectors deserve the money for spending their “time, energy and petrol.”

While the Customs Department and the Commerce Ministry are often accused of corruption because importers and exporters deal directly with them, officials say that the military and police are also involved in smuggling fuel, automobiles and drugs across borders.

Business representatives routinely complain of having to pay bribes to get their goods moving and complain that their products cannot compete with goods smuggled into the country without paying taxes. Furthermore, the petty corruption and smuggling hurts government revenue and scares off potential investors.

“So many goods have been smuggled into the country with the help of CamControl and Customs,” opposition lawmaker Son Chhay alleged this week.

“The military police are involved not only with smuggling goods, but also with illegal logging and drug trafficking. So much money has been stolen from the government all over the place.”

The past decade has seen periodic government crackdowns on customs and military officials and some tough rhetoric for reform, but little systemic change.

Back in 1996, three top customs officials were suspended for a document-forging scheme in which they undervalued imported vehicles so they could pocket the difference in import duties, which amounted to hundreds of thousands of dollars. At the time, analysts called the move “unprecedented” and said it was a sign that the government was ready to pass anticorruption legislation, which had been sitting in the National Assembly since 1995. Some nine years later, an anticorruption draft law is still sitting gathering dust in the Assembly.

In 1999, Prime Minister Hun Sen told a forum of foreign investors that Customs officials who demand bribes would be fired. At the time, he said: “Mr Customs has to stop disturbing investors…. Customs is the king of corruption.”

The most recent incident occurred in October, when five Sihanoukville port customs officials were arrested by police in connection with the smuggling of 24 kg of heroin to Australia last April. The five included Kin Ly, the Sihanoukville Customs bureau chief, and his deputy, Pen Sarath, the brother of Pen Siman, director of the Customs Department. Four days later, all five were released after Hun Sen announced they were not involved in the case.

On the same day they were arrested, Phnom Penh authorities arrested an RCAF two-star general and a lieutenant colonel on charges of trafficking heroin and amphetamines. They too were later released because of a lack of evidence.

The Customs Department is tight-lipped.

Pen Siman did not answer numerous phone calls made over the course of a week. Kum Nhem, the deputy director for international affairs, commented on reform efforts, but deferred all questions on allegations of corruption to Deputy Director Lay Rithy. He did not answer repeated calls for comment placed over a number of days. One Phnom Penh-based official who heads an office in the Customs Department said he could not even comment anonymously because higher ups would conduct an investigation to find out who talked.

“Of course they won’t talk,” said one CPP government official who has observed the Customs Department over the past decade. “They are afraid they will lose their position, which is very expensive.”

Son Chhay alleged, and the CPP official confirmed, that Customs officials pay thousands of dollars to be appointed to the “profit” postings, which include Sihanoukville, Poipet, Bavet in Svay Rieng province and other positions “all along the border.”

When put together, the CPP official said, the department’s 1,200 officers based on the nation’s borders, ports and airports comprise a hierarchy propped up on payments that filter to the top.

“If you are clean and go into the system, you will be corrupted,” the official said. One official working in the Customs Department, speaking on condition of anonymity, said that Customs is not solely to blame for the unchecked corruption. More than five “very big” import-export businesses with “special connections” do not pay duties when they import goods, he said, though he refused to name the companies.

“Everybody knows, but nobody can say details,” he said.

Investors have noticed. As written in the Investment Guide, corruption was widespread in both lower administrative levels and “higher levels.”

“One frequently made complaint was about illegal imports, which exposed domestically manufactured products to unfair competition,” the report goes on. “The private sector acknowledged that the Government had taken some steps to deal with this problem, but so far it had shown limited success.”

Further hampering the government’s “success” is the military’s involvement with smuggling, the official working in the Customs Department said, adding that the military makes more money off smuggling than the Customs Department does.

“Many [Customs] officers want to be against the smugglers,” he went on. “But we have no guns, no equipment. We have no power. Customs cannot control the border.”

Though automobiles frequently cross the border with ease, gasoline comprises 70 percent of everything smuggled into the country, he added.

Gasoline tax revenue figures bear this out. While the number of cars increased steadily in the past decade, the gasoline tax revenue has gradually fallen since 1994.

“With poor governance, loose border control and widely acknowledged rampant corruption in the country,” a recent report by the Economic Institute of Cambodia said, “fuel smuggling for quick windfalls is simply too irresistible.”

A report released last year by Societe Generale du Surveillance, a private Swiss import inspection agency, said the country loses at least $120 million per year in tariffs—about 28 percent of total domestic revenue—because importers commonly undervalue goods.

“In many cases, it is found that the value of the goods declared by the importer, or shown on the documentation submitted, is far lower than the one determined by SGS,” the report said.

It listed several examples. Malaysian cigarette paper, declared at $7,821, was valued at $18,423 by SGS. A shipment of track shoes and used vehicles from Singapore was worth $14,127, not the declared $6,944. And a satellite transmission system from the US was declared to be valued at $8,000, while SGS valued the system at $77,247.

Issues of petty corruption and smuggling take on greater importance to the nation’s fiscal health because about 77 percent of the government’s revenue depends on import-related charges, according to Robert Hagemann, resident representative of the International Monetary Fund.

Considering further that roughly 60 percent of the country’s imports are exempt from duty, primarily because of the Law on Investment, the government does not have much to skim off the top if it wants to raise civil servant wages, maintain roads and lower the alarming child mortality rate.

The country, Hagemann wrote in a recent e-mail, has “one of the most generous sets of exemptions that my colleagues at the Fund have seen anywhere in the world.” These include 100 percent exemption from import duties on construction materials, production equipment, machinery, intermediate goods and raw materials. Not surprisingly, Cambodia has the lowest revenue intake of any least developed country in the region.

Kum Nhem defended the exemptions, saying they were necessary to attract foreign investors and retain the garment industry, which employs about 230,000 mostly female workers and needs to import all of its raw materials.

“The exemption is huge, but we have to look at having the industry stay in Cambodia,” Kum Nhem said. “We have no other.”

Since government revenue hinges so much on the Customs Department, and since the country was invited to join the World Trade Organization on the condition that it modernize customs’ procedures, many donors, including the IMF, the UN and the Japan International Cooperation Agency, are assisting the department. Reforms are taking place, Hagemann wrote, but the government has not shown the political commitment necessary to reform the department.

“We believe much more political will would have been needed to make the additional progress that…could have been achieved, and which would have been to the benefit of all Cambodians,” he wrote.

The UN offered to overhaul and computerize the country’s archaic customs clearance system back in 1997. The UN’s Automated System for Customs Data, known by the acronym Asycuda, aims to simplify customs procedures, increase customs revenue and produce reliable and timely statistics. It is being used in more than 80 countries, including Vietnam, East Timor, Rwanda and Zimbabwe.

Kum Nhem said recently that the government was not able to implement the project in the past “because of lack of experience and lack of funding.” The department is now conducting a “real review” of the UN’s proposal, he said, after which it will be presented to Minister of Finance Keat Chhon for approval.

A foreign official in a donor agency familiar with the negotiations said that the government would have no problem securing funding for a system that would hasten reform and increase revenue. The only reason to delay in acquiring the system, he said, was “to keep in place vested interests.”

In a recent e-mail, Renaud Massenet, regional coordinator for the UN Conference on Trade and Development, also said funding would not be a problem.

“It is now for the government to decide on the next course of action and to mobilize the required funding,” he wrote. “In this regard, and should the government give Customs reform and automation a high priority, it is very likely that funding could be secured for the project.”

The IMF also stressed the importance of obtaining an automated customs clearance system like Asycuda.

“It is essential for the country to adopt such a system, if the objective is to have a modern customs administration,” Hagemann wrote. “Experience has shown that automating customs processes has a positive impact on revenues, improves consistency of treatment, improves accuracy of revenue accounting, tightens internal controls and streamlines import [and] export processes, thereby reducing costs.”

But, he warned, installing an automation system requires a strong political commitment and good management practices to be beneficial.

“Although the existence of such a system might deter smugglers because of an increased perception of risk, the system per se does little to help Customs in the fight against smuggling,” Hagemann wrote. “Smuggling is a complex issue that transcends customs administration, and solving this problem requires the full cooperation of the police, the security forces and the judiciary, in addition to customs.”

“We need equipment,” customs deputy director Kum Nhem said, reciting a list that included speed boats, radio communications, pick up trucks and the latest information technology. “There are a wide range of equipment and tools we need, but we lack funding.”

As the ships roll in to Sihanoukville port, officials in suits drive new Toyota Camrys and Land Cruisers on the paved roads of the port’s manicured grounds. When the ships dock, large containers are lifted off by towering cranes and then delivered to a storage ground where they are stacked in high rows.

On a recent visit to the port, construction workers were busy building a new 6.5 hectare storage area to expand the port’s capacity, expected to be completed in 2005. Offshore, a vessel was dredging the ocean floor so larger ships could dock.

More than 1.77 billion tons of goods passed through the Sihanoukville port last year, up slightly from 1.67 billion in 2002. Along with plans to expand the port, which was originally built in 1956, the government and JICA are also touting plans to turn Sihanoukville into a tax-free zone for foreign investors.

Perched above the bustling grounds of the port is the stylish office building of Lou Kim Chhun, the Port Authority’s Director General.

“I’m happy to set up Sihanoukville as a special promotion zone,” he said this week, displaying plans for the port’s expansion and a proposed Sihanoukville-Phnom Penh growth corridor. “I see the port as a locomotive for the region.”

Though port officials work “very closely” with customs officials, Lou Kim Chhun was careful to distinguish their function and behavior. While the Customs Department is a department of the Ministry of Finance, the Port Authority is under the Ministry of Public Works and Transport.

At the port, he claimed, all payments were administered transparently and no under-the-table payments occurred. Throughout the interview, he talked of accountability, reducing port tariffs and making the port competitive with others in the region. He expected all transactions to be computerized by 2005.

But on port grounds, customs and CamControl officers inspect the cargo and money reportedly exchanges hands.

Port users “claim they pay a lot of under-the-table money,” Lou Kim Chhun said. “But authorities claim they get much less than the [port users] report.”

Nonetheless, he acknowledged that the port’s regional competitiveness may suffer if the country gains a reputation for uncontrolled corruption.

“We need to study how to reduce under-the-table payments,” Lou Kim Chhun said. “I hope the government, and especially the prime minister, are paying attention.”

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