 |
| Ex-Federal Minister for Ports & Shipping Babar Ghauri (MQM) |
The NATO containers case dates back to April 8, 2010 when the Directorate General of Customs Intelligence, after receiving specific information that a container No. SOLU7066253 with miss-declared goods had left Karachi for Peshawar, registered a case FIR 40/2010 at I & P Branch, Customs House, Peshawar. On April 10, 2010, two persons (a Customs Clearing Agent of M/s Tayyaba Agencies and a transporter of 39 M/s Umair International) were arrested from Karachi. During interrogation, the Clearing Agent confirmed that the container belonged to M/s Lunar Products, Kabul, Afghanistan. On April 13, 2010, the said container was found in a dismantled condition on Ring Road, Peshawar. The proprietor of the said premises was also arrested. Further investigations had revealed that several other Afghanistan bound NATO containers had left Karachi but had never crossed the border. Several other misappropriations and illegal activities were also discovered.
It may be recalled that the Supreme Court of Pakistan had taken suo moto action in the case. In the Case No. 16/2010 regarding “ISAF Container Scam”, the Supreme Court vide No. 16/2010–SMC dated October 7, 2010 referred the matter, under Section 9 of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000, for investigation to the Federal Tax Ombudsman. Incorporated in the Supreme Court’s Order was a set of 14 specific questions ranging from the nature and extent of misuse of transit trade facilities, procedural vulnerabilities causing the misuse and fixing responsibility thereof to suggesting effective countermeasures to control such scams in future.
The investigations found out that there have been a series of serious organized scams since the years 2004-2005 and senior officers of Customs were all along fully aware what was going on. These were not isolated incidents but all part of normative behavior of the unscrupulous Customs officials. What is really disturbing is that rather than taking appropriate measures to prevent such scams, the FBR’s response was mainly to set up ‘fact finding committees’ to buy time to confuse the real issues.
The investigations found out that the abuse of the Afghanistan Transit Trade was massive, though difficult to quantify with a high degree of precision. It was estimated that at least 7,922 transit containers were pilfered within Pakistan between the years 2007-2010. The estimated loss to the national exchequer during that period, based on 7,922 containers, was worked out at Rs.19 billion. The investigation report said that it could be just a tip of the iceberg.
Report
on
ISAF CONTAINER SCAM
by
Office of the Federal Tax Ombudsman
10 January 2011
Report
on
ISAF CONTAINER SCAM
by
Office of the Federal Tax Ombudsman
10 January 2011
ii
List of Acronyms
AC Assistant Collector
AGPR Auditor General of Pakistan Revenue
AIB Appraisement Intelligence Branch
AO Appraising Officer
AT Afghan Transit
ATc Afghan Transit (Commercial)
ATn Afghan Transit (Non Commercial)
ATT Afghan Transit Trade
ATTA Afghan Transit Trade Agreement, 1965
ATTI Afghan Transit Trade Invoice
BA Border Agent
BG Bank Guarantee
BL Bill of Lading
CA Clearing Agent
CARe Customs Administrative Reforms
CBC Cross Border Certificate
CBR Central Board of Revenue
CEO Chief Executive Officer
CGO Customs General Order
CN Convoy Note
DC Deputy Collector
ECC Economic Coordination Committee of the Cabinet
EO Examining Officer
F/O Foreign Origin
FBR Federal Board of Revenue
FCL Full Container Load
ii i
FFA Freight Forwarding Agent
FIR First Information Report
FTO Federal Tax Ombudsman
GD Goods Declaration
GPRS General Packet Radio Service
GPS Global Positioning System
GSM Global Systems for Mobiles
HMT Hired Mechanical Transport
ID Identification
IGM Import General Manifest
ISAF International Security Assistance Force
KAFU Karachi Air Freight Unit
KICT Karachi International Container Terminal
KPT Karachi Port Trust
LCD Light Crystal Diode
MOU Memorandum of Understanding
NATO North Atlantic Treaty Organization
NLC National Logistics Cell
PA Principal Appraiser
PaCCS Pakistan Customs Computerized System
PCCS Pakistan Customs Container Security System
PICT Pakistan International Container Terminal
PRAL Pakistan Revenue Automation Limited, a private company owned and managed
by FBR
QICT Qasim International Container Terminal
RFID Radio Frequency Identification
ROD Receipt on Destination
SPO Senior Preventive Officer
TDR Trip Detail Report
iv
TO Terminal Operator
TP Trans-shipment (Permit)
TP No. Trans-shipment Number
UN United Nations
WCO World Customs Organization
WTO World Trade Organization
v
List of Tables
Table No. Title Page
1 Transit Trade with Afghanistan 8
2 Population, GDP and Per Capita Imports of Pakistan and Afghanistan 16
3 Volume of Transit Cargo (2005-10) 21
4 Containers imported by MS / Louis Berger Inc. during February ¡V July 2007 36
5 Containers Imported by M/s Lunar Products and M/s KOPCKE Global Trading
during 2007-10 40
6 Containers Imported by M/s Lunar Products and M/s Kopcke Trading, Kabul,
Afghanistan 42
7 Details of Liquor Containers Imported by Osman Sahebi Ltd, Kandahar 46
8 Year-wise Status of Transit Containers 47
9 More Anomalies Identified in PRAL Data 48
10 Containers Received at Border Stations after Inexplicably Long Delays 49
11 Time Taken in Completing a Round Trip by ISAF / NATO Containers 51
12 Time taken in Completing Round Trip by Commercial Transit Containers 52
13 Time Taken on Karachi-Border Station-Karachi Round Trip 53
14 Estimated Incidence of Duty / Taxes on Major Items Smuggled through Afghan
Transit Trade in a 20-feet Container 55
15 PRAL Data Analysed for a 12-Day Round Trip 62
v i
Executive Summary
Background
In the suo moto Case No. 16/2010 regarding ¡§ISAF Container Scam¡¨, the Hon¡¦ble Supreme
Court vide No. 16/2010¡VSMC dated October 7, 2010 referred the matter, under Section 9 of the
Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000, for investigation to
the Federal Tax Ombudsman. Incorporated in the Supreme Court¡¦s Order was a set of 14 specific
questions ranging from the nature and extent of misuse of transit trade facilities, procedural
vulnerabilities causing the misuse and fixing responsibility thereof to suggesting effective
countermeasures to control such scams in future.
Methodology of Investigation
vľ The FTO Secretariat immediately proceeded to seek stakeholder input on the subject
through individual notices. A public notice was also published in the press inviting the
interested parties / groups to give their views.
vľ Chairman FBR, Member (Customs) and a number of senior representatives of Customs
Collectorates, Customs Intelligence, PRAL, Police, FIA and NLC were interviwed in the
FTO Secretariat, Islamabad.
vľ Briefings were received from Chief Collector Customs (South) and Collectors of
Customs of Karachi and Port Qasim.
vľ Customs Examination System and Sealing System for transit containers was inspected at
West Wharf, Karachi.
vľ Karachi International Container Terminal (KICT) was visited and a presentation by the
management received.
vľ A presentation was received from M/s TPL Trakker, Karachi, on container sealing and
tracking technology available in Pakistan.
vƒæ Meetings were held in Federal Tax Ombudsman¡¦s Regional Office Karachi with a
number of stakeholders in the public and private sectors who shared their knowledge and
expertise on the subject of smuggling through misuse of transit trade mechanisms.
vľ Independent data of departure and re-entry of transit containers into the same port
terminals within less than 12 days was obtained from KICT, PICT and QICT. It was then
analysed on the basis of certain ¡¥physical impossibilities¡¦.
vi i
Input Evaluation
vľ Written and orally obtained information was compared with the replies furnished
by FBR and other concerned departments, agencies and institutions in the public
and private sector.
vľ Already available information in various reports on the subject was studied, and
cross-checks applied.
vľ Where needed, additional data / information was sought from the concerned
quarters.
vľ Conclusions were drawn on the basis of information and data gathered from all
sources.
Findings
(i) The quality of data held by PRAL was found to be highly unreliable. The available
cross-checks within FBR were also found to be highly vulnerable to fraud and
corrupt practices of various actors involved in Afghan transit trade.
(ii) It was soon realised that the abuse was massive, though difficult to quantify with a
high degree of precision.
(iii) It was estimated that at least 7,922 transit containers were pilfered within Pakistan
during the last almost four years. However, this could be just a tip of the iceberg.
(iv) The estimated loss to national exchequer during 2007-June 2010, based on 7,922
containers, was worked out at Rs.19 billion.
(v) It was gathered that the Customs procedural framework being highly porous
suffered from serious vulnerabilities.
(vi) While responsibility in general terms has been fixed, the individuals involved in
various mega scams of recent years are to be identified through criminal
investigation for which a mechanism is provided under Section 17 of the FTO
Ordinance.
(vii) One-Customs manual clearance system was found particularly prone to huge transit
scams.
(viii) The senior management of Customs failed to take necessary steps to put in place
appropriate countermeasures against repeatedly occurring scams.
vi ii
(ix) The investigation of four mega scams of containers in past few years indicates a
clear pattern. The phenomena of pilferage is not new, neither are the glossing over
efforts by senior officers to provide cover up through creating hindrances in
investigations, manipulation of record and data, diverting focus by ¡¥fact finding
committees¡¦. Deliberate attempts to diffuse focus of investigation against corrupt
and influential officials through ¡¥fact finding committees¡¦ were clearly discerned.
(x) In Lunar case the Collector who had failed to prevent wrong clearance of 52
containers laden with liquor was made part of the ¡¥fact finding committee¡¦, to
frustrate the course of investigation by Director General (Intelligence and
Investigation).
(xi) The leadership of Customs rather than initiating appropriate disciplinary / criminal
proceedings against the real culprits repeatedly tried to put a different gloss on these
scams.
(xii) The modus operandi in these mega scams remains the same; fake / forged
documents, primitive and manual clearance and processing systems, wide discretion
in the hands of unscrupulous customs officials, lack of transparency and effective
accountability, involvement of seniors otherwise responsible for oversight.
(xiii) The picture that emerges is of gross inefficiency, maladministration and corruption
in an organization that is geared to further principally individual and communal self
inertest of a few individuals at the cost of Pakistan and her people.
(xiv) This report is an exploratory start-up tool. Although it provides some answers, it
raises many more questions. The report identifies the work that needs to be done in
future and provides a good roadmap for the way forward.
Recommendations:
(i) Customs clearance and cross border certification and reconciliation procedures need
massive improvement, consolidation and rationalization.
(ii) Cross checks need to upgraded, diversified and externalized.
(iii) Transport system used for ATT needs to be organized on competitive basis, and
transporters given a level-playing field.
ix
(iv) Only bonded carriers should be allowed to transport ATT cargo. The vehicle fleet
used for the purpose must be upgraded in terms of technology input for safe
transportation of transit cargo.
(v) Security of cargo needs immediate enhancement through RFID seals, and live
monitoring through GPS.
(vi) ATT cargo should bear bar code embeddings for ease of detection, and to minimise
the chances of its smuggling back into Pakistan.
(vii) ISAF / UN / NATO should adopt the same technology and transport precautions as
are being used by US Forces (e.g. RFID seals and effective tracking / monitoring
through GPS).
(viii) Collusion by and corruption of Customs officials be effectively discouraged and
deterred in a sustainable manner.
(ix) A specialized and dedicated Collectorate needs to be created to deal exclusively
with the entire cargo in transit to Afghanistan.
(x) The definition of smuggling should be broadened to include in its purview any enroute
pilferages of transit goods.
(xi) The Directorate General (Intelligence and Investigation) needs to be suitably
upgraded to act as an effective deterrent against actual and potential tax evaders and
their accomplices within the Customs Department.
(xii) For better administration, FBR should be split into two Boards, one dealing
exclusively with Customs matters and the other dealing with taxes like income tax,
sales tax and federal excise duty. If that is not found appropriate at this stage, a
competent and honest senior officer of Pakistan Customs Service may be appointed
as deputy chairman FBR. The measure will provide better focus on matters relating
to management of Customs.
x
Table of Contents
List of Acronyms ii
List of Tables v
Executive Summary vi
Table of Contents x
CHAPTER 1 INTRODUCTION 1
Background 1
Scope of Investigation 3
Purpose of Investigation 3
Implications of Investigation 4
Methodology 4
CHAPTER 2 UNDERSTANDING AFGHAN TRANSIT TRADE AND SMUGGLING 7
Transit 7
Transit Trade 7
UN Convention on Transit Trade: Key Principles 8
UN Convention on Transit Trade: Salient Features 9
Smuggling 12
Smuggling and Transit 14
Smuggling from Afghanistan to Pakistan 15
Smuggling from Pakistan to Afghanistan 18
Smuggling across borders with other neighbours 18
Smuggling across the coastline 19
Reasons of Smuggling 19
A Summing Up 19
CHAPTER 3 AFGHAN TRANSIT: UNDERSTANDING THE PROCESSING AND
CLEARING PROCEDURES 20
Two Types of Transit 20
Regulatory Framework 20
Volume of Transit Cargo 21
Handling of Transit Consignments by Customs 22
Two Customs Systems 23
Process Flow of Afghan Transit Cargo 24
x i
Transportation of Transit Cargo 29
De-sealing of Containers at Customs Stations of Exit 30
Completion of Customs Procedure 31
Vulnerabilities of the Procedural Framework 32
CHAPTER 4 MEGA CONTAINER SCAMS: PAST THREE YEARS 35
The Louis Berger Scam 35
The 165 Containers Scam 37
The Manifest Container Scam 38
The ISAF Container Scam 38
A Summing Up 43
CHAPTER 5 AFGHAN TRANSIT TRADE: ESTIMATING THE EXTENT OF
CONTAINER SCAM 44
PRAL Data 47
NLC Data 49
Data from Terminal Operators 49
Analysis of Terminal Data 50
CHAPTER 6 CONTROLLING CONTAINER SCAMS 56
Diagnosis before Cure 56
Understanding the Disease 56
Legal and Environmental Issues 57
Containing the Disease 60
A Summing Up 64
CHAPTER 7 CONCLUSIONS AND RECOMMENDATIONS 66
CHAPTER 8 ANSWERS TO SUPREME COURT QUESTIONS 71
ANNEX-A LIST OF OFFICERS / PERSONS HEARD / CONSULTED BY THE FEDERAL
TAX OMBUDSMAN SECRETARIAT
ANNEX-B CONVENTION ON TRANSIT TRADE OF LAND LOG STATES
ANNEX-C AFGHAN TRANSIT TRADE AGREEMENT, 1965
ANNEX-D THE CUSTOMS ACT, 1969 (CHAPTER XIII)
ANNEX E PARA 25: PROCEDURE FOR FORWARD MOUNTING BASE (FMB) AT
KARACHI
xi i
ANNEX-F PARA 31: PROCEDURE OF TRANSHIPMENT OF NON COMMERCIAL
CARGO IN TRANSIT TO AFGHANISTAN
ANNEX-G CBRS LETTER DATED 29TH NOVEMBER 2004 ON TRANSIT PERMISSION
TO AFGHANISTAN
ANNEX-H ECC DECISION ON REJUVENATION OF NLC¡¦S COORDINATION ROLE
ANNEX-I CUSTOMS GENERAL ORDER NO. 4 OF 2007
ANNEX-J REVENUE DIVISION¡¦S NOTIFICATION DATED 6 JUNE 2005
ANNEX-K ROUTE ¡¥ALPHA¡¦: KARACHI ¡V PESHAWAR
ANNEX-L ROUTE ¡¥BRAVO¡¦: KARACHI ¡V CHAMAN
ANNEX-M REPORT ON INTERIM CHALLAN OF FIR NO. 29/2008 DATED 2ND JUNE
2008
ANNEX-N COPIES OF GDS BARRING MACHINE NUMBERS WHICH WERE LATTER
DELETED
ANNEX-O STATEMENT OF ACCUSED MUHAMMAD SOHAIL
ANNEX-P STATEMENT SHOWING DE-SEALING STATUS OF LUNAR CONTAINERS
AT TORKHAM
ANNEX-Q DG I&I¡¦S LETTER DATED 29TH APRIL 2010 ADDRESSED TO CHAIRMAN
FBR
ANNEX-R DG I&I¡¦S LETTER DATED 21ST MAY 2010 ADDRESSED TO CHAIRMAN
FBR
ANNEX-S DG I&I¡¦S LETTER DATED 25TH JUNE 2010 ADDRESSED TO CHAIRMAN
FBR
ANNEX-T DG I&I¡¦S LETTER DATED 2ND AUGUST 2010 ADDRESSED TO
CHAIRMAN FBR
ANNEX-U LETTER DATED 11TH DECEMBER 2010 FROM CEO PRAL
ANNEX-V STATEMENT OF CAPT. (R) LIAQAT ALI MALIK, SP
1
Chapter 1
INTRODUCTION
Background
Based on the criminal cases registered under various FIRs, scam reports by the national press and
electronic media from time to time and the matters relating to Criminal Petition No. 278/ 2010,
the Supreme Court of Pakistan took up the matter of what is known as the ¡§ISAF Container
Scam¡¨ in suo moto Case No. 16/2010. The Supreme Court orders dated 30.9.2010 were
communicated to the Federal Tax Ombudsman, vide SMC No. 16/2010-SCJ dated October 7,
2010, with the following directions:
¡§We are of the opinion that, prima facie, allegations appear to be correct falling within
the definition of maladministration as defined under section 2 (3) of Establishment of
Office of the Federal Tax Ombudsman Ordinance 2000, (hereinafter referred to as ¡§the
Ordinance¡¨). Therefore reference is directed to be sent to the Federal Ombudsman under
Section 9 of the Ordinance to investigate the allegations of maladministration on the part
of the Customs Department. Federal Ombudsman, inter alia, is further required to submit
answers to following questions, being substantive part of the reference:
1. Is the mechanism for transportation of the goods under Afghan Transit Trade
Agreement or any other identical instrument sufficient to prevent smuggling
inside the country?
2. As to whether the Customs authorities are prohibited to check the transit goods
en-route from Pakistani ports to the destinations outside the country?
3. If there is no prohibition, then what is the guarantee that 100% goods are the
same, for which permission is available through the Afghan Transit Trade
Agreement and no pilferage had taken place during its transportation from
Pakistan to Afghanistan?
4. As to whether within the country at different places there are check posts of the
Customs department to ensure that the goods are transported outside the country
without any pilferage, leakage etc. If it is so then why complaints of smuggling of
these goods are being received continuously?
2
5. As to whether allegation contained in renowned newspaper as well as television
channel Duniya Today dated 28.6.2010 wherein anchor person, Dr. Moeed,
alleged that 10,000 to 11,000 containers brought into Pakistan had not reached
the destination under the Afghan Transit Trade Agreement or any instrument and
the goods had been smuggled within Pakistan without making payment of the
duty? If so, how much loss has been caused to the public exchequer?
6. As to whether it is possible to fix responsibility upon the officers/ officials of FBR/
Customs Department for causing huge loss to the public exchequer if question No.
5 is established and then what action can be initiated against them, if above
questions are replied in positive in the formulations?
7. As to whether workable/ concrete mechanism can be adopted to avoid evasion of
duties in the name of transit goods for Afghanistan under agreement, which
actually is being smuggled into country including all kinds of contraband item
otherwise prohibited to import into Pakistan save in accordance with the relevant
laws?
8. Is it correct that under the garb of Afghan Transit Trade the items not in use in
Afghanistan are allowed to be imported for Afghanistan?
9. Is it correct that prior practice was that goods meant for transit would go under
seal affixed at Karachi, opened at Torkham, checked and thereafter resealed and
allowed to cross border?
10. Is there any clause in MOU that ¡¥Negative list¡¦ goods shall not be carried by
road/or should be declared and escorted from point of entry to exit?
11. Does government of Pakistan charge any amount other than custom duty for use
of Pak Ports, land route etc?
12. As to whether no precautionary measures based on scientific methods are
available with the Customs department to detect / ensure that the goods being
transported under the Afghan Transit Trade Agreement are not brought back to
Pakistan for the purpose of smuggling or the containers are allowed to be desealed
before reaching their destination, and if so happened who shall be held
responsible and subjected to legal actions?
3
13. As to whether the allegations contained in FIR No. 179/2009 dated 19.5.2009 that
the goods meant for Afghanistan under Afghan Trade Agreement were in fact
being smuggled into Pakistan on account of wrong disclosure /declaration and
due to this reason how much loss has been caused to public exchequer?
14. As to whether no mechanism is available to prevent pilferage, leakage, evasion of
the tax on the goods imported into Pakistan by land, sea or air routes on domestic
consumable goods under the Customs Act and other available laws? If it is so
then who is responsible for massive smuggling and evasion of duty, causing huge
loss to public exchequer?
15. Any other relevant question may be added by FTO.
Scope of Investigation
The primary reason for this investigation is the concern of the Supreme Court in fulfilling its
duty to strictly enforce the relevant provisions of the law, particularly Article 9 of the
Constitution of Islamic Republic of Pakistan, 1973, because, ultimately, the revenue generated
by the government is to be spent for the welfare of the life of the citizen, and therefore, leakage,
pilferage and evasion of duty has to be checked strictly. Forming the immediate concern of the
Supreme Court was the contraband cargo possibly in thousands of containers that was being
brought to Pakistan¡¦s ports under fraudulently prepared documentation and with the declared
intent that it would be carried across to landlocked Afghanistan. However, the cargo was being
pilfered within Pakistan exposing the vulnerabilities of Customs Department, as also other
agencies involved in transit trade.
Purpose of Investigation
The purpose of this investigation isi.
to thoroughly, impartially and scientifically research the concepts and issues involved in
the container scam and as identified by the Supreme Court of Pakistan;
ii. to examine the processes of Customs related to transit cargo, and identify problem areas;
iii. to study and analyse the circumstances surrounding the ¡¥ISAF Container Scam¡¦ and fix
responsibility where existing laws and processes may have been violated to deprive the
government of its legitimate revenue;
4
iv. to ascertain the nature and extent of the ¡¥ISAF Container Scam¡¦ and other mega scams of
recent years;
v. to identify a way forward that isa.
tamper proof;
b. cost effective and practical; and
c. in line with the best international practices.
Implications of Investigation
The instant investigation is of utmost significance not merely because it will have far reaching
implications for our economy but also because it could lay the foundation for long needed
reforms in the anachronistic and outmoded organisational practices of FBR. The report offers a
great opportunity where an independent forum of the Federal Tax Ombudsman has been asked
by the Supreme Court to conduct an in-depth study of the processes and working of Customs
Department. Not only will this report be a reference point for different authorities and
stakeholders, it also envisions the way forward for critically impacting the future of Pakistan.
That is why an extreme caution has been exercised in analysis and evaluation of the available
information so that the conclusions arrived at are credible, and recommendations based on sound
reasoning.
Methodology
Keeping in view the multifaceted nature of the investigation involved in the preparation of this
report, the following methodology was adopted by the Office of the Federal Tax Ombudsman.
Examination of documents
Case files
The following cases detected by different agencies were reviewed:
¡E Louis Berger case detected by Customs Intelligence
¡E 165 container scam detected by Customs Intelligence
¡E Manifest container scam detected by Port Qasim Collectorate
¡E ISAF container scam detected by Customs Intelligence
¡E Case file of containers seized by Islamabad Police
5
Case studies and reports
¡E Pakistan Electronic Trade (PACKET) Report
¡E National Trade Facilitation Strategy of Ministry of Commerce
¡E Task Force on Tax Administration Reforms Report
¡E UN Convention on Transit Trade Land Locked Countries
¡E Internet and newspaper articles
¡E UTrade magazine
¡E Available literature on Afghan Transit Trade and customs processing and
modernization systems
Personal interviews
¡E Senior Customs officials
¡E Experts of shipping lines
¡E Clearing Agents
¡E Transporters
¡E Afghan Transit Trade experts
¡E Experts from PRAL
¡E Subject matter experts in the media
Data analysis
¡E Data requisitioned from the following organisations on different occasions was
analysed.
¡E FBR
¡E PRAL
¡E NLC
¡E KICT
¡E PITC
¡E QICT
Inference methodology
The data obtained from PRAL was found to lack required level of reliability. How
reliance could be placed on data suggesting that a truck laden with a container left
6
Karachi for a border Customs station (Chaman, Amangarh or Torkham) and returned
back, after completing the round trip, within a few hours. The data of NLC was also
seriously flawed. The inference methodology adopted here for data analysis is based on
what is widely regarded as a physical impossibility and what appeals to common sense.
As it was not possible to draw valid conclusions on the basis of PRAL or NLC data,
reliance has been placed on Terminal Operators¡¦ data that prima facie appeared to be real
time and so relatively much more authentic. There is a danger with this sort of approach:
it is too conservative. The containers that may have pilfered their cargo within Pakistan
but did not hurry back to the port terminal or got delayed due to any emergency
obviously would be missed out. However, it is better to be conservative and sure footed
than to arrive at seemingly incorrect conclusions.
During our interviews, we found general consensus that a reasonable timeline in which a
container would generally do a quick Karachi-Afghanistan-Karachi trip was 15 days; 12
days would be considered a quick return, while a 10-day round trip would be exceptional.
The task before the Federal Tax Ombudsman Office is to determine the extent of damage to
Pakistan¡¦s economy due mainly to the pilferages and leakages in the transit trade with
Afghanistan, and to suggest effective countermeasures. Given the time constraints, it was not
possible to address the issues in their entirety in this exploratory report, which nonetheless offers
a good starting point. A lot of useful work has been done systematically and independently but
more is left for the future. The report in addition to providing answers to issues raised by the
Supreme Court of Pakistan provides a realistic roadmap for the future.
The chapter 2 contextualises transit trade and smuggling, while chapter 3 deals with the Customs
procedural framework for clearance of transit goods. It also compares the largely manual One-
Customs system with the fully automated PaCCS. Chapter 4 gives an overview of the mega
scams of recent years. Chapter 5 estimates the size of transit scams over the past four years.
Chapter 6 deals with possible countermeasures, and chapter 7 gives conclusions and
recommendations. Chapter 8 covers answers to Supreme Court¡¦s terms of reference.
7
Chapter 2
UNDERSTANDING AFGHAN TRANSIT
TRADE AND SMUGGLING
It is essential to understand certain basic concepts before delving into a deeper analysis of
various aspects of the container scam. Transit trade and smuggling are distinctly different
concepts, but are often mixed up with each other. So let us start with understanding first what we
mean by transit, transit trade and smuggling.
Transit
Transit is the transport of goods of a land locked country to pass through the soil of another
country, without imposition of fiscal and trade regulations prevailing in the country of passage as
those are not the imports of the country of passage. Transit starts with the entry of goods in the
country of passage and culminates when the goods reach the country of destination. Once the
goods reach the final destination, they are subject to rules and regulations in vogue in that
country. Transit goods are not part of the economy of the country of passage.
Transit Trade
There are 31 countries with no access to sea. These countries are divided into seven clusters,
Afghanistan being in the Central Asian cluster along with Kazakhstan, Kyrgyzstan, Tajikistan,
Turkmenistan and Uzbekistan.
A country can be at a highly disadvantageous position due to its being land-locked. The
bordering states can impose conditions and restrictions on their imports and exports and weaken
it politically and economically. For creating fair and equitable transit rights and obligations the
United Nations Convention on Transit Trade was adopted on July 8, 1965 (Annex-B). Pakistan is
a signatory to this convention.
According to a recent estimate1, goods worth over US$ 6.16 billion were transited into
Afghanistan during 2009-2010.
1 The Jang: 9 August, 2010
8
Table 1
Transit Trade with Afghanistan
Country Trade Volume %
Pakistan US$ 2.10 billion 34
Uzbekistan US$ 1.99 billion 32
Iran US$ 1.50 billion 25
Turkmenistan US$ 0.57 billion 9
Total US$ 6.16 billion 100
It is evident from the above figures that Pakistan¡¦s share is just over one-third of the total Afghan
transit trade. Uzbekistan and Iran closely compete for their share in transit trade with
Afghanistan.
UN Convention on Transit Trade: Key Principles
1. In order to promote fully the economic development of the landlocked countries, these
countries should be afforded by all states, on the basis of reciprocity, free and unrestricted
transit, in such a manner that they have free access to regional and international trade in
all circumstances and for every type of goods; the goods in transit should not be subject
to any customs duty; and the means of transport in-transit should not be subject to special
taxes or charges higher than those levied for the use of means of transport of the transit
country.
2. In order to enjoy the freedom of the seas on equal terms with coastal states, the states
having no sea-coast should have free access to the sea. To this end the states situated
between the sea and a state having no sea-coast is obliged by common agreement with the
latter and in conformity with existing international conventions to accord to ships flying
the flag of that state treatment equal to that accorded to their own ships or to the ships of
any other state as regards access to seaports and the use of such ports.
3. The principles that govern the right of free access to the sea of the landlocked states shall
in no way abrogate existing agreements between two or more contracting parties
concerning the problems, nor shall they raise an obstacle as regards the conclusions of
such agreements in the future, provided that the latter do not establish a regime which is
less favourable than or opposed to the above mentioned provisions.
9
4. The state of transit, while maintaining full sovereignty over its territory, shall have the
right to take all indispensable measures to ensure that the exercise of the right of free and
unrestricted transit shall in no way infringe its legitimate interests of any kind.
UN Convention on Transit Trade: Salient Features
Freedom of transit
Freedom of transit shall be granted under the terms of this Convention for traffic in transit and
means of transport. Subject to the other provisions of this Convention, the measures taken by
Contracting States for regulating and forwarding traffic across their territory shall facilitate
traffic in transit on routes in use mutually acceptable for transit to the Contracting States
concerned. Consistent with the terms of this Convention, no discrimination shall be exercised
which is based on the place of origin, departure, entry, exit or destination or on any
circumstances relating to the ownership of the goods or the ownership, place of registration or
flag of vessels, land vehicles or other means of transport used.
Customs duties and special transit dues
Traffic in transit shall not be subjected by any authority within the transit State to customs duties
or taxes chargeable by reason of importation or exportation nor to any special dues in respect of
transit. Nevertheless on such traffic in transit there may be levied charges intended solely to
defray expenses of supervision and administration entailed by such transit. The rate of any such
charges must correspond as nearly as possible with the expenses they are intended to cover and,
subject to that condition., the charges must be imposed in conformity with the requirement of
non-discrimination laid down in article 2, paragraph 1.
Means of transport and tariffs
The Contracting States undertake to provide, subject to availability, at the points of entry and exit, and as
required at points of trans-shipment, adequate means of transport and handling equipment for the
movement of traffic in transit without unnecessary delay.
Methods and documentation in regard to customs, transport, etc
The Contracting States shall apply administrative and customs measures permitting the carrying out of
free, uninterrupted and continuous traffic in transit. When necessary, they should undertake negotiations
to agree on measures that ensure and facilitate the said transit. The Contracting States undertake to use
10
simplified documentation and expeditious methods in regard to customs, transport and other
administrative procedures relating to traffic in transit for the whole transit journey on their territory,
including any trans-shipment, warehousing, breaking bulk, and changes in the mode of transport as may
take place in the course of such journey.
Exceptions to Convention on grounds of public health, security, and protection of
intellectual property
Nothing in this Convention shall affect the measures which a Contracting State may be called
upon to take in pursuance of provisions in a general international convention, whether of a
world-wide or regional character, to which it is a party, whether such convention was already
concluded on the date of this Convention or is concluded later, when such provisions relate to
export or import or transit of particular kinds of articles such as narcotics, or other dangerous
drugs, or arms; or
Nothing in this Convention shall prevent any Contracting State from taking any action necessary
for the protection of its essential security interests.
Pak-Afghan Transit Trade Agreement, 1965
Transit Trade Agreement between the Government of the Islamic Republic of Pakistan and the
Government of the Kingdom of Afghanistan was signed at Kabul on March 02, 1965 (Annex-C).
The salient features of the agreement are as follows:
Article-I
The Contracting Parties undertake in accordance with the provisions of this Agreement to grant
and guarantee to each other the freedom of transit to and from their territories.
No distinction shall be made which is based on the flag of vessels, the place of origin, departure,
entry, exit or destination or any other circumstances relating to the ownership of goods, of
vessels or of other means of transport.
Article-IV
No Customs duties, taxes, dues, or charges of any kind whether national, provincial or municipal
regardless of their name and purposes, shall be levied on traffic in transit except charges for
transportation or those commensurate with the administrative expenses entailed by traffic in
transit or with the cost of services rendered.
11
Article-IX
The Contracting Parties agree that railway freight, port and other dues shall be subject to the
most sympathetic consideration and shall be no less favourable than those imposed by either
Party on goods owned by its own nationals.
Article-X
Nothing in this Agreement shall be construed to prevent the adoption and enforcement by either
Party of measures necessary to protect public morals, human, animal or plant life or health and
for the security of its own territory.
Protocol Annexed to ATTA
Article-1
The two Governments agree that there shall be open competition for all transporters for carriage
of all category goods to and from Afghanistan irrespective of ownership of goods.
Article-2
The two Governments agree to accord to transporters and clearing and forwarding agents from
either country national treatment.
Article-3
No discrimination shall be made by the authorities of either Government in the matter of
allocation of freight as between the transporters of either country.
Article-4
Each Government agrees that no taxes shall be levied by it on transport vehicles registered in the
territory of the other country except by prior consultation and on basis of equality.
Article-5
The two Governments agree that-
(A) Route permits shall be issued by the country in which the vehicles are registered;
(B) Driving Licenses and certificates of fitness in respect of transport vehicles covered by this
Protocol issued in one country shall be valid in the other country also. Vehicles carrying
petroleum and petroleum products shall continue to be governed by existing practice regarding
certificates of fitness; and
12
(C) The period for which vehicles of one country may stay in the other on each trip shall be fixed
on uniform reciprocal basis.
Article-6
The two Governments agree to grant to transporters multiple entry visas valid for a period of six
months at a time.
Article-7
The two Governments agree to grant to transport vehicles road permits for a period of six months
at a time.
There is an Dto the Agreement on Customs and other procedures dealing with passengers¡¦
unaccompanied baggage entering Pakistan for transit to Afghanistan and moving from
Afghanistan to foreign countries through Pakistan.
Customs Act, 1969: Provisions Relevant to Transit Trade
Sections 126 to 129 of the Customs Act, 1969 deal with transit cargo (Annex-D). The detailed
procedure under the Customs Act was prescribed under Paragraph 25 of CGO 12 of 2002 dated
15.06.2002 (Annex-E) for ISAF and UN relief imports when ISAF established a Forward
Mounting Base at Karachi. Subsequently, Paragraph 31 was added to the CGO (Annex-F),
prescribing procedure for movement of military and humanitarian relief subsistence cargo for
international forces and diplomatic missions for transit to Afghanistan. The latest instructions for
the regulation of transit trade were issued by FBR vide C. No.3 (1) L&P/2004-A dated
29.11.2004 (Annex-G). The ECC also took decisions from time to time on the issue of
transportation of transit cargo (Annex-H). In the year 2007, the FBR put in place a system for
sealing and de-sealing of trans-shipments for safe transportation of transit cargo vide CGO 4 of
2007 dated 31.03.2007 (Annex-I).
Smuggling
Smuggling means arrival or departure of goods in or out of a country in violation of trade
restrictions / prohibition or quota allocation and without payment of duty / taxes. Smuggled
goods do not contribute to the economy and instead cause immense loss to the society being
detrimental to the exchequer. Free availability of smuggled goods flooding the local market
poses a threat to legal imports and local industry.
13
While types, methods and actors in the smuggling matrix may vary, the economic impact of the
phenomenon is the same: the impoverishment of tax revenues.
Smuggling is conducted both through unofficial and official channels i.e. routes where customs
role is almost negligible as well as through notified customs-stations. The first may be termed as
¡¥blue-collar smuggling¡¦ and the latter ¡¥white-collar smuggling¡¦. The former is made possible due
to failure of border security forces operating in the area and the latter due to inefficiency and / or
connivance of Customs for evasion of duty / taxes through under-valuation, mis-declaration of
quantity, description and classification. Strangely, the thousands of containers carrying hightariff
transit goods that are pilfered within Pakistan or not treated as falling within the scope of
smuggling.
Smuggling through official channels
This is by far the most treacherous form of smuggling where regulators / controllers and
perpetrators of crime join hands to make detection extremely difficult, if not altogether
impossible. Direct contact between taxpayer and tax collector provides an enabling environment
and legitimate government revenues are plundered by colluding partners. This form of
smuggling remains usually hidden from the oversight of different watchdogs as well as media
due to legal and technical intricacies and the fact that vested interests on both sides of the table
protect each other.
No confirmed estimates are available on the size of either form of smuggling. However, neither
form is insignificant. The end result is the same, legitimate government taxes are evaded,
affecting legal imports and local industry and the victim country¡¦s economy. Another way of
looking at the same phenomenon is the composition of its players: the foot-soldiers, the
underlings doing the mundane and menial work of carrying the goods across borders and
occasionally facing the wrath of law and the real owners, the investors who organize the
racketeering and who are the real beneficiaries of the crime but the so-called long arm of the law
never reaches them.
Smuggling as defined under the Customs Act, 1969
The Customs Act, 1969, Section 2(s) defines smuggling as follows:
14
¡§smuggle¡¨ means to bring into or take out of Pakistan, in breach of any prohibition or restriction
for the time being in force, or evading payment of customs-duties or taxes leviable thereon-
(i) gold bullion, silver bullion, platinum, palladium, radium, precious stones, antiques,
currency, narcotics and narcotic and psychotropic substances; or
(ii) manufactures of gold or silver or platinum or palladium or radium or precious stones,
and any other goods notified by the Federal Government in the official Gazette, which, in
each case, exceed one hundred and fifty thousand in value; or
(iii) any goods by any route other than a route declared under Section 9 or 10 or from any
place other than a customs-station;
and includes an attempt, abetment or connivance of so bringing in or taking out of such goods;
and all cognate words and expressions shall be construed accordingly.¡¨
The Customs Act, 1969, does not make every breach of the import or export trade control
regulations, or attempt to evade the revenue, culpable of the crime of smuggling, but it does
highlight the significance of authorized routes, as even non-prohibited goods or non-notified
goods are deemed to be smuggled if imported or exported through unauthorized routes.
However, importation of goods prohibited by law does not essentially tantamount to smuggling
unless the goods are so notified by the Federal Government under sub-clause (ii) of Section 2(s).
List of goods so notified by the Federal Government is at Annex-J. Originally limited to only a
few items, the list has been expanded over time to 54 categories of smuggling-prone items. The
threshold value of notified items for the purposes of Section 2(s) has also been progressively
raised from Rs.1,000/- to Rs.150,000/-.
Smuggling and Transit
Smuggling and transit are completely distinct concepts. Smuggling starts where transit finishes.
There is no direct relationship between transit and smuggling. Smuggling may exist
independently or because of transit, as is the case in Pakistan.
¡´ Smuggling exists in countries that do not have transit facilities, while in other countries
with huge transit activity, smuggling may be unheard of.
15
¡´ While transit is a legal process, regulated and protected by law, smuggling is an illegal
and criminal activity which happens as a consequence of lax enforcement and ineffective
controls.
¡´ Transit always involves multiple governments, while smuggling is predominantly the
issue of a single government.
¡´ Transit Cargo is smuggled back into Pakistan after it has crossed the Afghan border. It is
conducted either through the normal customs channels or through illegal border
crossings. These smuggled goods are then sold in the local market.
Smuggling from Afghanistan to Pakistan
A number of products, especially high tariff items, are smuggled from Afghanistan to Pakistan,
including vehicles, auto parts, cigarettes, tea, tyres, ball bearings, crockery, diapers, air
conditioners, printing plates, fabrics, mobile chargers, batteries, DVD players, LCD TVs and
perfumes. The items excluded from transit through Pakistan like cigarettes and auto-parts are
brought into Afghanistan through Iran and other countries with similar transit facilities and
smuggled to Pakistan. Alcohol which is not officially importable in Afghanistan, like Pakistan, is
imported through mis-declaration of transit goods for Pakistan¡¦s flourishing black market.
As soon as the Afghan trucks carrying transit cargo to Afghanistan cross the border they are
offloaded and the cargo is carried back to Pakistan. Fully loaded trucks or pickups bring back the
transit cargo from Afghanistan to Pakistan to various godowns along the border. This cargo is
then transferred to Pakistani trucks for their return journey back into the Pakistani markets. It
may be noted that all legislative devices like clear markings ¡¥in transit to Afghanistan¡¦ are all
whitewash measures in the face of lax enforcement and collusion of border security agencies.
The goods return to major markets with all the markings intact. Strangely, the thousands of
containers carrying high-tariff transit goods that are pilfered within Pakistan are not treated as
falling whitin the scope of smuggling.
The problem of smuggling in Pakistan is essentially much wider than merely the issue of Afghan
transit trade. According to one estimate, goods worth more than US$ 5 billion are smuggled into
Pakistan annually mainly from Afghanistan, UAE, Iran, China and India in that order.
Smuggling from Afghanistan is said to constitute about half of it, and about 75% is ATT-related.
16
According to a World Bank study conducted in 1997, almost 80% of goods allowed transit to
Afghanistan are smuggled back to Pakistan.
Table 2
Population, GDP and Per Capita Imports of Pakistan and Afghanistan
Country Year Population
(million)
Total
GDP
US$
(billion)
Per
Capita
GDP
US$
Total
Imports
US$
(billion)
Per Capita
Imports
US$
Pakistan 2009-10 170.6 166.5 976 28.47 167
Afghanistan 2009-10 29.7 14.04 350 8.552 288
Source: http://en.wikipedia.org
The fact that per capita import of Afghanistan is 72% higher than per capita import of Pakistan
despite the fact that the former¡¦s per capita income levels are almost one-third of the latter¡¦s
clearly substantiates that Afghanistan imports goods far in excess of its legitimate requirements.
There is a porous 2,640 km long border between Pakistan and Afghanistan, and even items
currently on the Negative List of ATT (cigarettes, tobacco and auto parts) are routinely
smuggled. Motor vehicles in containers come to Afghanistan through ports in Iran. These are
then brought to border areas adjoining Pakistan for smuggling into Pakistan. When we restrict
certain goods in transit, their smuggling does not stop; only the route changes.
Seymurgh carrying tyres entering Pakistan on main road from Afghanistan
2 Different figures in Tables 1 and 2 are from different sources.
17
Vehicles at Vaish Mandi in Afghanistan waiting to be smuggled to Pakistan after being bought by Pakistani buyers
18
Trucks bringing smuggled goods across the Khojak Pass from Chaman towards Quetta
Smuggling from Pakistan to Afghanistan
A huge quantity of goods including flour and fertilizers is smuggled into Afghanistan from
Pakistan. Government of Pakistan spends billions in imports and subsidies on fertilizers. The
export of fertilizers is banned under the Export Policy Order. Its smuggling to Afghanistan badly
hurts Pakistan¡¦s economy. Wheat, sugar and other edible commodities are also smuggled into
Afghanistan at the expense of Pakistan¡¦s own population.
Smuggling across borders with other neighbours
Pakistan also has borders with India, Iran and China, in addition to a large coastline. Smuggling
takes place across all these borders, and through the sea. For instance, large quantities of diesel
and petrol are smuggled into Pakistan from Iran on daily basis. It is done either in tankers each
carrying about 15,000 litres, or in smaller high speed pickups loaded with plastic cans. The
smuggled fuel is sold in improvised road side fuel pumps across Balochistan and adjoining areas
of other provinces.
It may be noted that items that are smuggled across international borders keep changing over
time. As the complexion of a country¡¦s economy changes, so does the nature of smuggled goods.
In other words, it is not the enforcement effort that has a significant bearing on what is smuggled
but rather the nature of economy and the price differential of goods between us and our
neighbours.
19
Smuggling across the coastline
Vast expanse of coastline is also used for smuggling of commodities like electronics, battery
cells, fabrics, vehicles, cigarettes, and especially alcohol. Both unofficial and official channels
are used for the purpose. Launches laden with smuggled goods arrive and offload their cargo at
predetermined places. Launches are also used to smuggle from Pakistan contraband drugs like
hashish, already smuggled from Afghanistan and stored here. Pakistan Coast Guards is the
foremost anti-smuggling agency in the sea.
Reasons of Smuggling
A number of economic, social and legal factors contribute to the phenomenon of smuggling. The
relative significance of these factors varies from country to country. Among other causes, the
following are more significant for our perspective:
(i) Pakistan¡¦s relatively much higher tariff and taxation incidence on lawful imports,
particularly on consumer goods;
(ii) consumer preference for imported goods;
(iii) failure of import substitution industry;
(iv) collusive, lax and inefficient law enforcement; and
(v) weak accountability.
A Summing Up
The issues of transit trade and smuggling, though independent of each other, do overlap and
unless these are treated as such it will not be possible to control the phenomenon of widespread
smuggling in Pakistan. While extension of transit facilities to neighbouring countries is an
international obligation, prevention of illegal entry of goods from across the border or pilferage
of transit goods within Pakistan before they cross over to Afghanistan is a failure of the state
apparatus, the departments and officials that choose to connive and collude for serving their
personal interests, at the cost of national interests. However, failure of law enforcement agencies
cannot be construed as failure of the law.
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Chapter 3
AFGHAN TRANSIT: UNDERSTANDING THE PROCESSING
AND CLEARING PROCEDURES
Under ATTA, the transit facilities were started in 1965. The events of September 11, 2001,
however, led to a situation where other governments started to operate inside Afghanistan.
ATTA obviously did not provide for the imports into Afghanistan of the United States and other
ISAF governments like United Kingdom, Germany, France and Italy. Post-9/11 Pakistan was
thus confronted with a situation where two distinct types of cargoes would be flowing through its
territory: ATT-related Afghan commercial cargo and the non commercial or military cargo of
various governments operating in Afghanistan.
Two Types of Transit
Due to the nature of military cargo and the fact that imports by governments have distinct rights
and privileges over normal commercial consignments, it was critical to evolve a fool proof
mechanism where each type of transit to Afghanistan was correctly and distinctly identified and
processed accordingly. Failure to correctly identify different consignments and / or absence of
clear and effective regulations on importers, customs clearing agents, transporters, etc. could be a
recipe for disaster, potentially opening huge opportunities for the unscrupulous elements within
and outside the Customs Department.
Military or non commercial supplies to Afghanistan were further divided into two distinct types,
based on the manner these were to be processed by the Customs:
1. US Military cargo
2. ISAF/ NATO cargo
Regulatory Framework
Transit is currently being regulated under the following legal framework:
(i) Chapter-XIII of the Customs Act, 1969;
(ii) Afghan Transit Trade Agreement, 1965;
(iii) Protocol attached to ATT Agreement;
(iv) Custom House Karachi Public Notice No.16/2000 (A) dated 30.09.2000 for
Commercial Transit;
21
(v) Paras 25 and 31 of CGO 12 of 2002 dated 15.06.2002 for Non-Commercial
Transit, and FBR instruction vide C.No.3(1)L&P/2004-A dated 29.11.2004;
(vi) Customs General Order No.4 of 2007 dated 31.03.2007;
(vii) ECC of the Cabinet decisions for transport of transit cargo:
a) Case No.ECC-51/4/2002 dated 28.03.2002;
b) Case No.ECC-201/17/2002 dated 04.11.2002;
c) Case No.ECC-58/4/2005 dated 26.04.2005.
In addition, there are a host of splinter decisions taken from time to time at policy and
operational levels.
Volume of Transit Cargo
During the period (2005-June 2010) a total of 558,141 containers were transited to Afghanistan.
Of these 166,949 (30%) containers belonged to the US Military, 52,929 (9%) to ISAF/ NATO
and the remaining 338,263 (61%) were commercial ATT consignments.
Table 3
Volume of Transit Cargo (2005-10)
Collectorate
Containers
2005 2006 2007 2008 2009
2010
(up to
Jun)
Total
MCC
Appraisement
24462
(1781)
30452
(2346)
49203
(2652)
51262
(4820)
70899
(4049)
36507
(3331)
262785
(18979)
MCC Port
Qasim
3568
(1485)
11436
(5147)
12272
(4732)
12102
(6448)
23483
(10165)
12617
(5973)
75478
(33950)
MCC PaCCS
(US Military only)
-
(15728)
-
(18088)
-
(22180)
-
(27127)
-
(54387)
-
(29439)
-
(166949)
Total
28030
(18994)
41888
(25581)
61475
(29564)
63364
(38395)
94382
(68601)
49124
(49421)
338263
(219878)
Grand Total 47024 67469 91039 101759 162983 87867 558141
(Figures in brackets indicate non-commercial cargo)
22
Handling of Transit Consignments by Customs
After the transit cargo has reached the ports in Pakistan, its list is made available to Customs
through a document called the IGM. This is done by the ¡§carrier¡¨, the Shipping Line, bringing
the cargo to Pakistan from abroad. The IGM contains information that includes the following:
a) Name of importer
b) Address of importer
c) City and country of importer
d) Name of sender
e) Address of sender
f) City and country of sender
g) Bill of lading number
h) Numbers of containers, their size, type, seal numbers, etc
i) Nature of cargo
While correct identification of destination is not a difficult task since this is easily discernable
from the country of importer as ¡§Afghanistan¡¨, the determination of ownership and whether it is
¡§commercial cargo¡¨ for processing under the ATTA or ¡§non commercial cargo¡¨ for use by the
US Military / ISAF / NATO is not so straightforward. The IGM does not contain information
that always correctly identifies the importer. The Name of Importer included in the IGM is what
is declared to the Shipping Line at the time of booking of cargo, but the Shipping Line does not
have any legal mechanism to verify the name shown on the IGM. The same importer may be
using different names or different importers may have the same name on the IGM, making it
difficult to exactly identify the actual owner of the cargo. For example, the name ¡§LOUIS
BERGER GROUP INC USA AID¡¨ was fraudulently used for a commercial transit consignment
for Afghanistan. Similarly, ¡§LUNAR PRODUCTS / ISAF KABUL, AFGHANISTAN¡¨ turned
out to be an impostor.
It is clear that a fool proof mechanism is critical to unambiguous identification of the importer as
a cleverly crafted name in the IGM can confuse the true identity / destination of the cargo. It can
also lead to a situation where an importer can produce a fictitious document to Customs with
fake signs and stamps and drive away with transit containers (without paying any duty / taxes).
23
Two Customs Systems
There are two parallel clearing systems in vogue in Pakistan Customs. One is the traditional One-
Customs system that clears the non-commercial ISAF / NATO as well as the ATT-related
commercial cargo to Afghanistan. Whatever automation is there in One-Customs system has
been provided by PRAL. The second is PaCCS that in the context of transit deals only with the
non-commercial US Military cargo. PaCCS introduced in April 2005 is independent of PRAL. It
is an electronic, automated, web enabled, computerized system that was set up as a pilot project
for initially dealing with only full container loads at KICT.
One-Customs Manual System
Like other government departments, One-Customs being a traditional system is mostly based on
paper files and signatures and stamps. The client has to present paper documents to Customs for
processing. There is direct contact between the taxpayer and the tax collector. The record
keeping of paper documents is cumbersome. Each paper document in Customs has about 34
signatures and 62 verifications. No wonder that fixing responsibility is so hard; officials facing
inquiries find it convenient to deny their own signatures. The basic problem, and one which has
direct bearing on the present investigation, however, is how to determine the authenticity of a
paper document.
PaCCS
Being essentially an automated system, PaCCS servers are connected to the Shipping Lines, the
Terminal Operator, various branches of National Bank of Pakistan, to FBR, the relevant Customs
staff, importers /exporters and embassies, etc. All the users can connect to PaCCS over the
internet, with their user names and individual passwords which are legally deemed their digital
signatures under the Customs Act, 1969. In PaCCS, the importers / exporters can get connected
to Customs from anywhere. They conduct their business online without need for any paper
document. All information as declared by them is validated against the information provided to
Customs directly by Shipping Lines, Terminals, Banks, FBR, etc. As importers can conduct their
business without coming to Customs offices, the contact between the taxpayer and the tax
collector is virtually eliminated. The system is equipped with FIFO (First In First Out); the
Customs officials can neither expedite nor delay anyone at will. Finally, as all regulations
relating to imports / exports, taxes, concessions, etc. are built into the software, the discretion
24
available to Customs officials is largely eliminated. In September 2006, PaCCS was rolled out to
the remaining two major Terminals: QICT and PICT, when it started handling almost 60 percent
of all cargo through Karachi ports, although in the context of Afghan transit, it continued to
handle the US Military cargo only.
Process Flow of Afghan Transit Cargo
PaCCS (US Military Cargo)
The Shipping Line electronically files manifest information to Customs over the internet
regarding the containers to be off-loaded on Pakistan¡¦s ports.
The Bill of Lading declaring the importer to be in Afghanistan is considered as Afghan
Transit cargo by the PaCCS system.
The United States embassy is required to login into PaCCS through its user ID and
Password and ¡¥own¡¦ the Bill of Lading.
PaCCS electronically instructs the Terminal Operator to release the containers ¡¥owned¡¦
by the US embassy for transportation by trucks that have been duly authorized by the US
embassy, subject to fulfilment of other requirements, including NOC by NLC.
The terminal computer system releases the containers to authorized truckers and informs
PaCCS of truck numbers, seal numbers, container numbers, the destination and the date
and time when the truck will leave the terminal gates.
PaCCS electronically passes all the information to the border customs-station as soon as
the trucks leave the terminal gate.
As the trucks arrive at the border customs-station, the Customs staff receives the
containers in PaCCS system giving date and time and condition (whether seals found
intact on receipt).
As the containers cross the border the information is entered into PaCCS.
The US embassy has complete information at every stage and shares the responsibility to
ensure that their cargo crosses into Afghanistan.
25
One-Customs System (ISAF/NATO Cargo)
Nominee of consignee (ISAF/NATO) writes a letter to the Collector of Customs
verifying BL number indicating the ownership of the consignment and nominating a
representative (Clearing Agent). (After the recent ISAF container scam, a letter from the
concerned embassy is also required for the Collector of Customs showing the ownership
of goods.) A copy is endorsed to Commanding Officer of NLC for arrangement of
transportation. The same copy is also endorsed to the Excise & Taxation Officer or a
separate letter issued for exemption of Provincial Excise Tax.
A Goods Declaration is filed on line to One-Customs under PRAL¡¦s system. A GD
number is allotted along with date, exchange rate and Appraiser¡¦s name.
The Clearing Agent prints this GD and attaches all necessary documents, including
copies of BL, packing list, invoice, authority letter from consignee, embassy¡¦s letter, and
letter to Collector of Customs (original) from the consignee. These documents and GD
are submitted to the Customs (Afghan Transit Group).
Customs processes the GD, allows it out-of-charge and allots a ¡¥free number¡¦ (as Afghan
transit goods are duty/tax free).
Two copies of GDs along with copy of all above-mentioned documents are delivered to
the Clearing Agent.
The Clearing Agent takes these papers to Senior Preventive Officer (SPO) posted at the
Port. The SPO stamps it with ¡§Allowed Loading for Afghan Transit¡¨ giving serial
number with date as per their Register.
The Clearing Agent takes the GD to concerned Terminal (or KPT in rare cases). Terminal
Operator collects its dues and loads the container on the NLC trailer or a carrier with
NOC from NLC. Terminal Operator also issues a Gate Pass mentioning Container No.
and GD No. The trailer with container is brought to the Exit Gate (also called Out Gate)
where Preventive Staff and Terminal Operator¡¦s staff check and verify the Container
Nos. mentioned in the Gate Pass. Preventive Staff attaches its seal and issues a ¡§Form A¡¨
giving therein serial number, date and particulars of the consignment (e.g. container
number, seal number, transport unit number). Four copies are issued, two delivered to
26
Clearing Agent (one for driver and the other for sending to the destination (Peshawar or
Chaman Customs)) through Customs Dispatch Section, the third is retained by the Gate
Officer (Preventive Officer) while the fourth copy is delivered by SPO to concerned AC /
DC for his record.
The truck is sent by the Terminal to the ¡§Non PaCCS¡¨ gate where Customs staff is posted
and PRAL system is installed.
The Customs documents are checked by the Customs staff at the Exit Gate. The Terminal
staff is also stationed along with Customs at the Exit Gate. The PRAL computers
installed at the exit gates check whether the declarations are genuine. If all documents are
correct, the truck is allowed to leave the terminal.
Copies of paper documents are also sent to destination Customs stations: Torkham or
Chaman, as the case may be.
On their way to Chaman the seals of containers are checked at Khur Khera (between Hub
and Uthal) and Buleli (between Quetta and Qilla Abdullha) or at Baburloi (between
Khairpur and Sukkar) and Buleli. In case of Karachi-Torkham route, a similar checking is
made at check post at Baburloi and Khairabad (between Attock and Peshawar).
Necessary entries are required in a Register maintained for the purpose. (Maps of two
transit routes are at Annex-K and Annex-L)
The Customs staff at the border checks the papers issued by Karachi Customs. PRAL
system of Customs is updated accordingly.
Border Agent files documents with Customs for cross border. After processing the
documents, the cargo is allowed cross border. GD is stamped by the Customs and a copy
given to Border Agent for return to Port Qasim or Appraisement Collectorate, as the case
may be, through the concerned Clearing Agent.
One-Customs System (Commercial ATT Cargo)3
A GD is filed online to One-Customs on PRAL¡¦s system. A GD number is allotted along
with date, exchange rate and Appraiser¡¦s name.
3 The flow process is only for containers delivered at border stations by road.
27
The Clearing Agent prints this GD and attaches all the necessary documents (e.g. copies
of BL, packing list, invoice and Jawaz Nama issued by Ministry of Commerce,
Afghanistan along with eight copies of ATTI). Copies of all ATTIs bear the same
machine number as is allotted to the GD. All these documents and GD are submitted to
the Customs (Afghan Transit Group).
Customs staff processes the GD, conducts examination / inspection, if required, signs it
out-of-charge and allots a ¡¥free number¡¦ (as Afghan transit goods are duty/tax free).
Three copies of GDs along with a copy of all above-mentioned documents are delivered
to the Clearing Agent whereas one copy is retained by the Customs (in the Group).
The Clearing Agent takes these papers to Senior Preventive Officer (SPO) posted at the
port.
The SPO stamps it with ¡§Allowed Loading for Afghan Transit¡¨ giving serial number with
date as per their Register.
The Clearing Agent takes the GD to concerned Terminal (or KPT in rare cases). Terminal
Operator collects its dues and loads the container on the NLC trailer or a carrier with
NOC from NLC. Terminal Operator also issues a Gate Pass mentioning Container No.
and GD No. The trailer with container is brought to the Exit Gate (also called Out Gate)
where Preventive Staff and Terminal Operator¡¦s staff check and verify the Container
Nos. mentioned in the Gate Pass. Preventive Staff attaches its seal and issues a ¡§Form A¡¨
giving therein serial number, date and particulars of the consignment (e.g. container
number, seal number, transport unit number). Four copies are issued, two delivered to
Clearing Agent (one for driver and the other for sending to the destination (Peshawar or
Chaman Customs)) through Customs Dispatch Section. The third copy is retained by the
Gate Officer (Preventive Officer) while the fourth copy is delivered by SPO to concerned
AC / DC for his record.
The truck is sent by the terminal to the ¡§Non PaCCS¡¨ gate where Customs staff is posted
and PRAL system is installed.
The Customs documents are checked by the Customs gate staff at the Exit Gate verifying
correctness. The terminal staff is also stationed along with Customs at the Exit Gate. The
28
PRAL computers installed at the Exit Gate check whether the declarations are genuine. If
all documents are correct, the truck is allowed to leave the terminal.
Copies of paper documents are also sent to destination customs-stations: Torkham or
Chamman.
On their way to Chaman the seals of containers are checked at either Khur Khera
(between Hub and Uthal) and Buleli (between Quetta and Qilla Abdullha) or at Baburloi
(between Khairpur and Sukkar) and Buleli. In case of Karachi-Torkham route a similar
checking is made by checkposts at Baburloi and Khairabad (between Attock and
Peshawar), and necessary entries made in a Register maintained for the purpose.
The Customs staff at Amangarh, Nowshehra, deseals the cargo for cross stuffing on
either Afghan trucks or local trucks arranged by the importer. The cargo is again sealed
and allowed to proceed to Torkham.
The Customs staff at the border checks the papers issued by Karachi Customs. PRAL
system of One-Customs is accordingly updated.
Border Agent files documents with Customs for cross border. After processing the
documents, the cargo is allowed to cross border and ATTI is got stamped by the Afghan
Customs and returned to Customs which sends a copy of the same to Port Qasim
Collectorate or Appraisement Collectorate, as the case may be.
Comparison of Process Flows of Two Customs Systems
In PaCCS the customs computer system is linked to the Terminal Operator¡¦s computer system.
The consignments are released by Customs and directly communicated to the terminal which
delivers the containers accordingly to the owners. The Exit Gates are manned by the terminal
staff themselves, and the liability to ensure that only correct containers leave the terminal is on
the Terminal Operator. To address the risk related to unauthorized clearance, the Terminal
Operator is required to furnish a bank guarantee of US $ 1 million.
In One-Customs the PRAL computers are not linked to the Terminal Operator¡¦s computers. The
Customs clears the consignments on paper declarations. The owner or the Clearing Agent takes
the Customs-cleared documents to the terminal and takes delivery against these paper
documents. The Exit Gates are manned by Customs staff. The PRAL¡¦s computers at Exit Gates
29
are to be updated when paper documents are presented for release of cargo after verification, but
in practice it rarely happens. The liability to ensure that only correct containers leave the terminal
is not on the Terminal Operator but on Customs and PRAL. In One-Customs, due to
inadvertence or connivance of Clearing Agents with the Customs officials, it is not infrequent
when wrong information is fed while e-filing GDs. The usual ¡¥mistakes¡¦ include wrong cargotype
codes, wrong destination codes and non feeding / wrong feeding of sealing data. The result
is that the system updating at border stations becomes almost impossible. Even otherwise, it is
easier for the forged and fictitious documents to get accepted under a manual system than in a
fully automated environment. Then there are other problems. Due to slow connectivity and
connectivity failures through PRAL-V Sat, the One-Customs, in particular, is unable to keep
pace with the physical clearance process of large volume of containers. The unscrupulous
elements within and outside the Department often collude not to let the system stay operational,
when needed.
Transportation of Transit Cargo
The Customs allow transport of the commercial and non-commercial transit cargo through
Pakistan Railways and NLC respectively. However, the US / ISAF / NATO cargo for transit to
Afghanistan is allowed transportation through private sector on the recommendation of Foreign
Office subject to NOC by NLC. The vehicles selected by US are from reputable transport
companies and the containers are moved under RFID seals from Karachi ports to final
destinations in Afghanistan. Most vehicles used for the purpose have tracking devices for live
monitoring of their position and movement en-route. The private vehicles used by ISAF / NATO
are not of the same standard as the US. Nor are they fitted with tracking devices. Although they
are allowed to travel up to destinations in Afghanistan, their cargo is not fitted with RFID seals.
This explains why there are hardly any cases of en-route pilferage under the cover of US Military
cargo.
Being bonded carriers, both Pakistan Railways and NLC are responsible for safe transportation
of commercial transit cargo from ports at Karachi under the Shippers¡¦ and Customs¡¦ seals. While
Pakistan Railways transports commercial cargo from Karachi to City / Cantt Railway Station,
Peshawar, NLC transports commercial cargo to NLC Customs Station at Amangarh near
Nowshera. Likewise, they both transport commercial cargo from Karachi to Chaman. The share
30
of Pakistan Railways in the transport of commercial cargo is less than 10% as private sector
trucks authorized by NLC are taking the lion¡¦s share to transport transit cargo of both
commercial and ISAF / NATO categories.
De-sealing of Containers at Customs Stations of Exit
Commercial Cargo
The transit cargo of commercial category transported by rail or road is examined, on selectivity
criteria, before it is transferred to Afghan trucks at Railway Stations of Peshawar / Chaman or
Customs Station at Amangarh, as the case may be. Before examining the goods, containers are
inspected by Customs to see that they have not been tampered with and that their seals are intact.
After inspecting the containers and the seals, containers are de-sealed and goods are examined on
selectivity criteria to verify that these are the same goods as were examined by Customs at
Karachi. After satisfactory inspection and examination the containers are resealed and goods are
allowed transfer to Afghan trucks arriving for the purpose. If the goods are transferred to open
Afghan trucks, these are covered by tarpaulins and are sealed by Customs. These Afghan trucks
are called Second Transport which is generally moved in convoys from Customs Station
Amangarh or Railway Stations of Peshawar to Torkham under Customs escort to protect the
cargo from en-route pilferage. The cargo is again de-sealed at Torkham and subjected to similar
inspection and examination. The commercial cargo is allowed to cross over Pak-Afghan border
under the authority of Customs documents of the port of origin in Karachi duly endorsed by
Customs at Amangarh or Railway Stations of Peshawar, as the case may be, as well as the border
Customs at Torkham. The broken seals removed from containers are kept in the Seal Box for a
period of three months. The quadruplicate copy of ATTI and Form-A accompanying the cargo
from Karachi through to border Customs Station at Torkham are retained by the Customs at
Torkham as evidence of arrival of goods and vehicles at the border. The ATTI is endorsed by
Pakistan Customs as well as the Afghan Customs at the border in token of dispatch and receipt of
commercial goods across Pak-Afghan border. The quadruplicate copy duly endorsed to the effect
of border crossing is retained by border Customs of Pakistan at Torkham as their permanent
record and duplicate copy of ATTI similarly endorsed with cross border certification carrying
three Customs Officers¡¦ signatures is officially sent to the Customs authorities of port of origin
to serve as Cross Border Certificate. The drivers have to submit a document showing receipt on
31
destination (ROD) to NLC under NLC procedure as an evidence of delivery of goods at
destination which is Customs Station at Amangarh for commercial goods and Kabul for noncommercial
goods. The procedure is the same for transport of commercial cargo through
Chaman but there is no such deviation as it is for Torkham.
Non-Commercial Cargo
Transit cargo meant for ISAF / NATO / UN forces operating in Afghanistan is shipped in
containers from foreign counties under the Shippers¡¦ seals to Karachi Port or Port Qasim.
(Gwadar Port will be used for transit under the new Transit Agreement signed recently by the
Government of Pakistan and Afghanistan.) After satisfactory inspection that the container is not
tampered during shipment or during its dwell-time at the ports or the container terminals,
Customs put their own seals in addition to the Shippers¡¦ seals already affixed on the containers,
and clear the consignment for transportation to Afghanistan through Torkham or Chaman
Customs Stations. The ISAF / NATO / UN authorized representatives known as ¡¥contractors¡¦
engage NLC registered / authorized vehicles for transportation of cargo to Afghanistan. When a
vehicle transporting transit cargo arrives at the Customs Station at the border, de-sealing i.e.
breaking of Customs Seals is done by Customs in accordance with the procedure prescribed
under CGO 4 of 2007 dated 31.3.2007 after satisfactory inspection of the seals and nontampering
of containers. The facts of de-sealing are required to be recorded in the Customs TP
Export Register being maintained by the Border Customs and uploaded on real time basis on
PRAL¡¦s computer connectivity under One-Customs system. Gate Pass is accordingly prepared
and the vehicle/ consignment is allowed border crossing on its journey to final destination in
Afghanistan.
Procedure of de-sealing of containers meant for US Forces is the same at the Customs Borders
Stations of Exit. However the US embassy electronically confirms border crossing and receipt at
destination of their consignments in the PaCCS system. The MCC PaCCS matches the data with
the uploaded de-sealing data in One-Customs. In case of any missing entries in One-Customs
hard copies of CBCs are obtained from the Customs Stations of Exit.
Completion of Customs Procedure
Customs procedure ends with receipt of CBC and online acknowledgement and thus they clear
the manifest accordingly treating the consignments having transited to Afghanistan. NLC
32
requires an additional confirmation known as ROD (Receipt on Destination) on their TDR (Trip
Detail Report) through the registered / authorized transporters. After receipt of CBC and ROD,
NLC also treats the transport and delivery of transit cargo duly completed.
Vulnerabilities of the Procedural Framework
Diversified by the US / ISAF / NATO dimension and the burgeoning magnitude of commercial
transit cargo through Pakistan has exposed many a vulnerability of the procedural framework of
transit system. It would be pertinent therefore to take stock of the system in terms of its
vulnerabilities. It is disturbing to note that the apparently elaborately laid out procedure
prescribed for dealing with transit trade in Pakistan is too porous and the precautionary
mechanisms too naive to be effective. No wonder that the porous procedures and failed
precautionary mechanisms defining the current transit environment are put to massive misuse by
fraudulent importers and colluding Customs and NLC officials. Some of the significant
disconnects and failures of precautionary mechanisms are reviewed here.
Disconnect with Countries of Export
Transit cargo shipped from abroad undergoes the same customs procedure in the countries of
shipment as is being followed for exports from Pakistan. The customs documentation and
appraisement or examination procedures are generally similar the world over. These systems and
procedures have been harmonized and simplified under the guidance of the World Customs
Organization (WCO). However, as already noted, a brief description of the importer¡¦s particulars
given in the IGM is at times not very helpful in controlling imports-related frauds. So is the case
with mis-declarations of goods. What is needed to plug this vulnerability is establishing a real
time cross validation system between the transit country and the country of export on a
sustainable basis. Until that happens, the services of Pakistan¡¦s Commercial Counsellors abroad
could be utilized with advantage to repair disconnect with the Customs administration of
exporting countries.
Defective Description of Goods
Correct and specific description of goods enables efficient and honest examination. If the goods
in transit are described correctly, completely and specifically it can help the Customs in riskprofiling
of cargo. Likewise, if examination of goods is conducted competently and honestly a
reasonable level of deterrence can be achieved against misuse of imports in transit. It is,
33
however, observed that this aspect has been miserably ignored. Unspecific and vague
descriptions in some consignment of non-commercial cargo have been accepted and allowed
transit in the normal course. The requirement of correct description can greatly help the Customs
in risk-profiling of consignments and once any mis-declaration of description is detected through
examination, it can serve as evidence of mens rea and deliberate attempt to mislead the Customs
by manipulation of descriptions.
Discriminatory Mechanism of CBCs
Another vulnerability of the system is that whereas the CBCs for commercial cargo are required
to be endorsed by Customs staff of both Pakistan and Afghanistan on the Pak-Afghan border at
Torkham and Chaman in accordance with the procedure laid down vide Custom House Karachi
Public Notice No.16/2000(A) dated 30.09.2000, the CBCs prescribed by FBR under Para 31 of
CGO 12 of 2002 dated 15.06.2002 are required to be endorsed only by Pakistan Customs at the
Customs Stations of Exit. Besides, whereas CBCs of the commercial category of cargo in transit
are required under the procedure prescribed by Collector Customs Karachi under the aforesaid
Public Notice to the Karachi Customs through official channels without involving any private
person, the procedure for the non-commercial category prescribed by FBR under para 31 of
CGO 12 of 2002 requires handing over of the copy of CBC meant for Karachi Customs to the
¡¥transporter¡¦ for submission by representative of the Consulate to the concerned Collectorate of
Customs at Karachi. Practically, it is unlicensed ¡¥Border Agent¡¦ of the transporter who collects
the CBC at Torkham or Chaman and it is the Clearing Agent who hands over CBCs to the
Customs at Karachi which is a further deviation from the prescribed procedure.
Lack of Coordination with ISAF-HQ, Kabul
ISAF¡¦s Forward Mounting Base (FMB) established at Karachi in early 2002 started its import
procedures well by instituting an appropriate coordination mechanism by designating one of its
officers at Karachi to regularly coordinate Customs clearance matters with Additional Collector
Customs, Karachi Airport. But this coordination system fizzled out once the FMB was shifted by
ISAF to Kabul within a year of its establishment at Karachi. Had FBR demanded continuation of
the effective arrangement for coordination with ISAF HQ Kabul through alternate nomination of
a Karachi based official representative as has been put in place now, after the ¡¥ISAF Scam¡¦ came
to light, the possibilities of misuse of ISAF transit facility would have been contained through
34
better coordination and regular prior verification and post reconciliation of authorizations issued
by ISAF.
Mismanagement of Transport
Transport is the most critical link in the use or misuse of transit facilities. NLC uses hundred %
private transport for ISAF / NATO transit cargo and only 30% owned and 70% privately hired
vehicles for commercial category of transit cargo. In case of privately hired vehicles, NLC
simply gets documents signed from the transporter without ensuring safely and security of the
cargo. Moreover, NLC sublets transportation of Afghan cargo which at times is further sublet to
other transporters upto three or four tiers. During 2007-08 as many as 52 cases, all relating to
privately hired vehicles, were reported where CBCs were not produced. This vulnerability is
further corroborated by the fact that accused Muhammad Sohail got the vehicles of his choice
authorized by NLC to transport transit cargo of Lunar Products of Kabul. It needs to be
ascertained through a detailed investigation how many other such authorizations were given by
NLC to vehicles belonging to other unregistered transporters and how many of them misused the
transit facility. Yet another serious dimension of mishandling the transport coordination by NLC
is that NLC itself being a bonded carrier was required to have tracking system for live
monitoring of the vehicles movement. Being fully aware of this condition, NLC should not have
authorized private sector transport that did not have state of the art tracking system fitted in their
vehicles to operate.
35
Chapter 4
MEGA CONTAINER SCAMS:
PAST THREE YEARS
As mentioned in chapter 3, less than 10% of container traffic to Afghanistan through Pakistan
belongs to ISAF / NATO as against 61% for commercial ATT consignments. By labelling the
¡¥Lunar Container Scam¡¦ as ¡¥ISAF Container Scam¡¦ it is feared that attention might be restricted
to just 53,000 containers that transited to Afghanistan from 2005-June 2010, instead of focussing
on the real issue: the large scale loot and plunder that has continued - unabatedly - over time
under the umbrella of Afghan transit. The reality is that ISAF had nothing to do with the Lunar
containers. Nor were thousands of transit containers smuggling back into Pakistan after these had
crossed over to Afghanistan. As lax processes of Afghan transit had numerous black holes
deliberately kept as such to benefit organised syndicates of tax evaders / smugglers, the
unscrupulous elements within and outside Customs Department were always out there to exploit.
The transit containers were pilfered within Pakistan as the scams were ab initio designed as such.
Whenever Afghan transit process is seriously misused, it is not without active connivance or
implicit nod of relevant Customs officials. While we have yet to establish whether or not ISAF
played any role in planning or execution of ¡¥Lunar Container Scam¡¦, this report looks at the issue
in its wider context, not just ISAF.
The Louis Berger Scam
During the period February 2007 to July 2007, as many as 26 containers manifested for
Afghanistan in the name of Louis Berger Inc, US AID, Kabul, Afghanistan, never crossed into
Afghanistan and returned to the terminal within 25 days.
36
Table 4
Containers imported by MS / Louis Berger Inc. during February ¡V July 2007
BL Number Container No
Left
Karachi
for
Date
Depart
Time
Depart
Truck
No
Date reentered
Time
reentered
Truck
No on
return
Return
Status
Round
Trip
Time
854164053 MSKU0047847 Torkham 04/04/2007 06:10:59 LSC48 07/04/2007 16:56:11 TLC681 Empty 3.45
854032824 PONU7351070 Torkham 17/03/2007 03:28:28 LS4655 20/03/2007 17:43:05 LS5868 Empty 3.59
SZHVM3953 APMU8058774 Torkham 23/05/2007 06:44:09 LS4286 28/05/2007 19:14:23 LS4286 Empty 5.52
OOLU-
3012172850 OOLU5781773 Torkham 15/02/2007 01:50:47 LS4448 20/02/2007 14:54:23 TLJ514 Full 5.54
522777981 MSKU8047782 Torkham 21/04/2007 02:30:55 JT6915 26/04/2007 17:31:11 TLD198 Empty 5.63
854048928 MSKU9817722 Torkham 07/03/2007 06:06:23 JT7045 13/03/2007 11:22:30 TLC719 Empty 6.22
854326927 PONU7246429 Torkham 23/05/2007 06:14:44 LSB3685 29/05/2007 13:25:30 TLJ089 Full 6.30
854289508 MSKU9877491 Torkham 23/05/2007 06:41:41 TLJ902 29/05/2007 15:08:59 TLE287 Full 6.35
854048928 TGHU7940494 Torkham 07/03/2007 06:05:59 TLJ540 13/03/2007 16:14:45 TLJ540 Empty 6.42
854377959 PONU8002540 Torkham 25/05/2007 03:38:48 TLH206 31/05/2007 15:03:05 TLF788 Full 6.48
854655414 CAXU6332433 Torkham 27/06/2007 05:05:33 BRC8661 03/07/2007 16:37:51 TKK192 Empty 6.48
SZHDP2746 TTNU9924528 Torkham 09/05/2007 03:22:28 JT4584 15/05/2007 18:33:47 JU8965 Full 6.63
522914381 KNLU5060847 Torkham 09/05/2007 02:17:02 JT4200 15/05/2007 19:45:07 TLF364 Full 6.73
854034303 MSKU9938262 Torkham 07/03/2007 04:20:48 JT2567 14/03/2007 11:33:57 LSA9986 Full 7.30
512294700 MSKU9942220 Torkham 07/03/2007 04:20:14 LSA9377 14/03/2007 15:01:39 JT3366 Empty 7.45
SZHDP2741 MAEU8111733 Torkham 09/05/2007 06:03:32 3T3665 16/05/2007 18:46:41 JT3665 Empty 7.53
854266114 MSKU0062501 Torkham 09/05/2007 03:22:50 JT4695 17/05/2007 17:41:33 TLG190 Empty 8.60
512294705 MSKU8608116 Torkham 07/03/2007 05:56:56 JT2065 16/03/2007 20:21:23 TLB587 Full 9.60
854317383 GESU4183671 Torkham 23/05/2007 06:16:40 JT0754 01/06/2007 22:44:20 JT0754 Empty 9.69
854067324 MAEU8142082 Torkham 17/03/2007 03:28:17 QAC3374 26/03/2007 22:42:17 TLH489 Full 9.80
SZHDC2186 PONU1457466 Torkham 25/05/2007 03:36:08 JU1496 05/06/2007 19:23:52 TLD195 Full 11.66
512254350 MSKU9807909 Torkham 01/03/2007 01:29:17 LSA5868 13/03/2007 11:21:04 LSA5868 Empty 12.41
512221832 MSKU8095332 Torkham 01/03/2007 01:38:34 LSA7927 14/03/2007 11:54:28 LSA7927 Empty 13.43
NYKS-
479279835 NYKU5968679 Torkham 23/05/2007 07:20:16 LHO629 10/06/2007 17:29:14 JU0991 Full 18.42
OOLU-
2001902160 TRLU7320699 Torkham 23/03/2007 03:15:02 LS7755 14/04/2007 16:30:12 880833 Full 22.55
OOLU-
2001834680 OOLU8058794 Torkham 07/03/2007 01:46:36 JU2777 31/03/2007 09:35:10 TLC960 Full 24.33
What is more relevant to our present investigation is that 16 out of 26 containers involved in this
scam ¡¥travelled¡¦ from Karachi to Afghanistan and returned to the Terminal within 8 days, while
the remaining 10 did it between 8-24 days. In other words over 38% of total containers involved
in the scam took more than 8 days to return to the Terminal. Half of the containers entered the
terminal fully laden with export cargo.
The rip-off started to surface when in June 2008 the Directorate General of Intelligence &
Investigation, Regional Office, Peshawar, discovered that a container with 1012 cartons of
37
electronics goods that had left Karachi on 15 February, 2007, had not reached the border
customs-station, Torkham, even after more than 15 months of its departure from Karachi. A case
FIR 29/2008 dated 2 June, 2008, was registered. The subsequent investigations established that
Louis Berger had no connection with ATT or ISAF / NATO. The declarations / documentation
filed by Louis Berger were all fraudulently prepared (copy of Interim Challan in case FIR No.
29/2008 at Annex-M). The containers were never meant for Afghanistan, but for pilfering within
Pakistan.
It was also revealed that though Machine Nos. were duly allocated to declarations (copies at
Annex-N), these were deleted by the corrupt Customs staff after the consignments had left QICT.
(Incredibly, the data provided by PRAL does not contain any record of the above mentioned
containers.) A declaration once ¡¥out of charge¡¦ cannot be amended / deleted. It is illegal to cancel
a declaration after the goods have left the Terminal. It simply is tantamount to removing all
traces of a transaction from the record. It is obvious that what happened could not have been
done by lower-level officials alone. It was organised crime par excellence that could not have
been committed without nod from seniors.
The utter failure of the Customs to effectively monitor the movement of ¡¥transit¡¦ containers and
the absence of any fool-proof arrangements for ensuring that transit containers do cross into
Afghanistan on time reflects very poorly on the organisation of FBR. It is hard to believe that
Customs administration could be in such a terrible mess. If Customs sepoys or a PRAL clerk had
colluded in destroying paper records of the gates, they could not have authorized deletion of
electronic record from the servers. Prima facie, the scam could not have taken place without
collusion and connivance of their seniors. Presence of a collusive sub-culture within the Customs
is also apparent from the fact that rarely the required action is taken against the real culprits.
The 165 Containers Scam
During the period September 2006 to January 2008, a couple of hundred containers were
reportedly illegally cleared from Karachi, without payment of duties and taxes. After
reconciliation, it turned out that 165 containers involved in the scam were actually transshipments
(cargo meant for use within Pakistan). However, the reason this scam is being
highlighted here is that it bears striking similarities with the ¡¥Louis Berger Scam¡¦:
38
¡´ The principal accused in both cases is the same.
¡´ In most cases Machine Nos. were given and either fully or partially deleted from the
system after the goods had left the terminal.
¡´ The container terminal (QICT) in both scams was the same.
¡´ The accused within the Customs in both cases were the same.
The scam raises many intriguing questions. How did the containers cross the exit gate at the
terminal on the basis of fake papers when Customs / PRAL staff is posted there round the clock?
When the containers that had apparently left the terminal in September 2006 did not arrive at the
destination even after a year, why did the system fail to ring any alarm bells? Who was
responsible for timely monitoring of container movement? What, if any, action was taken to
ensure that the same modus operandi was not repeated again? Even more disturbingly, when the
Customs Intelligence tried to take action against the - lower-level - functionaries, they triggered a
strike to thwart any deterrent action against them.
The Manifest Container Scam
Yet another scam that took place during March to September 2008, ¡¥Manifest Container Scam¡¦,
involved fraudulent GDs filed at Port Qasim Collectorate. Concealing what the actual number of
containers was in a consignment, once the papers were accepted by the Customs, the entries in
the system were changed to reflect correct number of containers in each consignment. In this
way more containers were taken out of QICT than the number for which duties / taxes were
actually paid. In other words, containers not initially shown in the GDs were pilfered without
payment of duties and taxes, but, more seriously, without anybody knowing what their contents
were. All this was done by the relevant Customs officials acting in concert with PRAL staff.
Four different FIRs were lodged at Port Qasim Collectorate pertaining to 16 GDs involving 25
containers that were pilfered by using this modus operandi.
The ISAF Container Scam
On April 08, 2010, the Directorate General of Customs Intelligence, after receiving specific
information that a container No. SOLU7066253 with mis-declared goods had left Karachi for
Peshawar, registered a case FIR 40/2010 at I & P Branch, Customs House, Peshawar. On April
10, 2010, two persons (a Customs Clearing Agent of M/s Tayyaba Agencies and a transporter of
39
M/s Umair International) were arrested from Karachi. During interrogation, the Clearing Agent
confirmed that the container belonged to M/s Lunar Products, Kabul, Afghanistan. On April 13,
2010, the said container was found in a dismantled condition on Ring Road, Peshawar. The
proprietor of the said premises was also arrested.
By this time the Customs Intelligence discovered that a second container No. MSCU8889924 of
M/s Lunar Products had arrived at Karachi port. On scanning and physical examination the
container was found full of liquor (beer: 36,000 cans and Scotch whisky: 4800 bottles) against
declared Coca Cola (10,800 cans), Sprite (10,080 cans), soda water (9600 cans), mineral water
(12,720 cans) and sparkling water (3,600 cans). The value of declared goods as per invoice had
been shown as AED 56,700 (AED @ Rs. 23). However, the value of goods found as per physical
examination was worked out to Rs. 11,519,547 involving Customs duty of Rs. 10,367,592, Sales
Tax: Rs. 3,501,942, Advance Income Tax: Rs. 1,051,563 and Special Federal Excise Duty: Rs.
115, 195, totalling to over Rs. 15 million.
The investigation team arrested a Muhammad Sohail, local representative of M/s Lunar Products
in Pakistan. According to his confessional statement (Annex-O), Mateen, a foreign national of
Afghan origin and settled in Sweden, had contacted him for engaging his services for clearance
of ISAF cargo from Karachi. It was Mateen who supplied him authorization of ISAF HQs on the
basis of which he obtained recommendatory letters of Afghan Consulate General at Karachi. In
actual fact ISAF was not found to be having anything to do with the scam. The ISAF
representative in the British High Commission confirmed that no nation participating in ISAF
had claimed to have utilized the services of M/s Lunar Products. However, the recommendatory
letters written by Afghan Consulate General were confirmed to have been genuinely issued,
though on the basis of what during the investigation turned out to be fake ISAF letters.
Interestingly, according to PRAL data, 38 of 44 containers imported by M/s Lunar Products were
duly shown as received at Torkham or Amangarh (Annex-P). Further investigation confirmed
that M/s Lunar Products had imported a total of 49 containers (44 under fake ISAF documents
and 5 under fake ATs) during 2008-10, all containing liquor. Accused Sohail admitted in his
statement that all the consignments had been de-stuffed in Pakistan, while another accused Munir
Khan admitted that fake de-sealing and fake entries in the relevant Customs record were made at
Customs Station, Torkham, through private persons (Luppoos) hired by the Customs staff.
40
Accused Nadeem Khan (private person) admitted that he had made fake desealing entries in the
PRAL system at Customs Station, Torkham and also that he had made several fake entries in the
¡§Form A¡¨ Register. Accused Aziz-ur-Rehman (private person) admitted that he had made fake
entries in the TP Export Register by allotting duplicate numbers to 25 consignments. For at least
42 containers that never arrived at Torkham, fake CBCs were found to be available on record.
However, the processing staff of Customs Station, Torkham, denied owning their examination
reports and signatures on the CBCs. After initial hesitation, the FBR also finally admitted that
the CBCs of containers of M/s Lunar Products were fake as none of these containers had actually
arrived at Torkham.
The team investigating the scam concluded that a total of 52 containers, including 3 containers of
M/s Kopcke Global Trading of Kabul, the title that M/s Lunar Products used before 2008, was
involved in the scam.
Table 5
Containers Imported by M/s Lunar Products and M/s KOPCKE Global Trading during
2007-10
Name of
Importer
No. Of
Consignments
No. of
Containers
CBCs received
(No. of
Consignments)
CBCs
received
(No. of
Containers
Online
Acknowledgement
of Customs Station
of Exit (No. of
Consignments)
M/s Lunar
Products 47* 49 41 42 44
M/s Kopcke
Global
Trading
3 3 1 1 2
Total 50 52 42 43 46
*including one container seized at Karachi port before clearance
Although the ¡§ISAF Container Scam¡¨ was, prima facie, established, the Office of Federal Tax
Ombudsman nevertheless decided to subject this finding to further external validation and cross
checks.
It was observed that data of receipt on destination (RODs) maintained by NLC, the gate-in and
gate-out data of vehicles being maintained by Political Agent at Torkham, the data being
maintained by the Government of Afghanistan through their Ministries issuing Jawaz Nama and
41
exemption certificates for import of ISAF cargo by Afghan companies, and the data maintained
by Afghan Customs could provide further cross checks.
The NLC offices at Jamrud and Thokar Niazbeg (Lahore) reported that none of the containers
under reference arrived at Jamrud NLC station as per their procedure. The carriage contractors
authorised to transport these 52 containers have also contended that their vehicles registered with
NLC were not used for the purpose; rather the main lynchpin of the fraud, Sohail, used to
arrange vehicles at his own. The Political Agent¡¦s officials have also confirmed that there was no
entry in their records of gate-in and gate-out at Torkham. However, the information asked for
from Afghan authorities is awaited, despite efforts of Foreign Office to expedite the matter.
In the face of conclusive evidence to the contrary, the PRAL¡¦s contention that at least 36
containers did arrive at Torkham and crossed border is a damning reflection on the quality of its
data. The fact is that all 52 containers were pilfered in Pakistan, and all entries in relevant
Registers about their de-sealing, crossing of border, etc. were completely fictitious. ¡§Lunar¡¦s
containers crossed into Afghanistan only on paper.¡¨ A serious implication of this aspect is can
other data provided by PRAL be taken as reliable or valid?
It is to be noted that none of the containers involved in the Lunar scam showed up at the same
terminal as per the Terminal Operator¡¦s records. As at least one Lunar container was found in a
dismantled condition in Peshawar, it could be argued that the other containers might also have
been scrapped to make the crime difficult to detect. Alternatively, these (or at least some of
these!) containers may have returned to a terminal other than the terminal of their exit for which
the data is available.
As regards loss to the exchequer due to this scam, the Customs authorities have adjudicated the
extent of evaded duties / taxes in relation to a single (40 feet) container seized at the port in April
2010 at Rs. 15 million.
42
Table 6
Containers Imported by M/s Lunar Products
and M/s Kopcke Trading, Kabul, Afghanistan
Year
Containers
20 feet size 40 feet size Total
2007
(Kopcke) 3 0 3
2008 8 9 17
2009 9 13 22
2010 2 8 10
Total 22 30 52
Assuming that each 20-feet container would have involved roughly half the amount of duties /
taxes as compared with a 40-feet container, the total loss to the exchequer due to the Lunar
container scam alone works out to around Rs. 615 million, excluding penalties that the
adjudicating authorities may have imposed.
During the investigation of Lunar container scam, the investigating team suspected that possibly
5 containers belonging to M/s Supreme Foods and 22 containers belonging to M/s ES-KO had
been cleared under dubious circumstances. While M/s Supreme Foods¡¦ containers, like Lunar,
probably never crossed over to Afghanistan, but these were shown to have done so under fake
CBCs, the 22 containers belonging to M/s ES-KO were apparently cleared on the basis of fake
NOCs issued by Afghan Consulate, Karachi. It was also suspected that may more containers
belonging to M/s ES-KO had also been cleared against fake NOCs issued by the Italian
Consulate, Karachi. As the Italian Consulate has apparently dilly-dallied to respond in the matter,
the Office of Federal Tax Ombudsman intends to closely monitor this investigation, as also the
allegedly fake NOCs issued by the Afghan Consulate, Karachi.
Let us now move to another aspect of the FBR¡¦s functioning. While Lunar Container Scam was
under investigation of Directorate General of I&I wide FIR 40/2010 registered on 8 April, 2010,
the Peshawar Collectorate also lodged another FIR 42/2010 dated April 21, 2010, in relation to
the Lunar containers. This did not make sense except to create confusion or attempt to subvert
the focus of investigation. On April 29, 2010, the Director General, Customs Intelligence wrote
43
to the Chairman FBR (Annex-Q), agitating the issue of lodging of FIR 42/2010 by Peshawar
Customs. On May 18, 2010, the FBR constituted a ¡§Fact Finding Committee¡¨ headed by
Collector of Appraisement, Karachi, the same Collectorate that had cleared fraudulent Lunar
consignments. Resultantly, the Appraisement Collectorate forthwith stopped cooperating with
the Directorate General, Intelligence. On May 21, 2010, the Director General again wrote to
Chairman FBR (Annex-R), expressing serious concerns on the timing as well as composition of
the ¡§Fact Finding Committee¡¨. Terming inclusion of an officer of the Collectorate involved in
fraudulent clearance of containers as conflict of interest, the Director General requested that the
¡§Fact Finding Committee¡¨ should become active only after the conclusion of criminal
investigation of case FIR 40/2010. On June 25, 2010 and August 02, 2010, the Director General
again wrote to FBR informing of serious problems that he was facing in reconciliation of data
between Appraisement Collectorate on one hand and the PRAL¡¦s system at Chaman and
Torkham, on the other. Complaining that there was strong resistance to investigation of the scam
from within the Customs, he drew the Chairman¡¦s attention to ¡§Luppoos¡¨ given user names and
user IDs by relevant Customs officials to make fake entries in PRAL¡¦s computers and once again
agitated the issue of ¡§Fact Finding Committee¡¨ (Annex-S and Annex-T).
While ¡§ISAF Container Scam¡¨ is bit of a misnomer as containers imported by M/s Lunar
Products were shown as transit cargo of ISAF or commercial consignments ¡¥in transit¡¦ to
Afghanistan, in actual fact, the entire cargo consisting of ¡¥assorted alcoholic beverages¡¦ was
imported fraudulently with the sole intention of disposing it in Pakistani black markets. ISAF as
such had nothing to do with the scam.
A Summing Up
The upshot of above discussion is that there have been a series of serious organised scams in the
past about 5 years and senior officers of Customs were all along fully aware what was going on.
These were not isolated incidents but all part of normative behaviour of the unscrupulous
Customs officials. What is really disturbing is that rather than taking appropriate measures to
prevent such scams, the FBR¡¦s response was mainly to set up ¡¥fact finding committees¡¦ to buy
time to confuse the real issues.
44
Chapter 5
AFGHAN TRANSIT TRADE:
ESTIMATING THE EXTENT OF CONTAINER SCAM
Determining the quantum of pilferage of containers in transit to Afghanistan is a task that defies
exact quantification. In the absence of credible data from PRAL, and given that Customs
documentation at the border stations is not at all reliable, it was felt necessary to look for
independent information held by third parties.
A number of traders and clearing agents were asked about their perceptions as to the nature and
extent of smuggling involved in ATT. It was generally perceived that pilferage of transit cargo
had not only attained alarming proportions, it was growing over time. Off-loading of Afghan
transit cargo in local markets of Karachi was said to be a routine affair. One knowledgeable
person dealing with imports shared that over 80% of his business over the last one year had
shifted to smuggling-related ATT regime. Another individual well conversant with the tricks of
the trade shared that the transit trade containers with electronics and fabrics could be delivered
any time anywhere at the client¡¦s choice. Businesspeople contacted for the purpose generally
expressed the view that at least 10% of ATT containers were not actually reaching Afghanistan,
while at the extreme end of the spectrum it was said that the ratio could be as high as 40%.
In order to enhance reliability of our estimates, a great care has been taken to ensure that the
deductive process remains within the realm of scientific inquiry, and at no time does it take the
wings of conjecture. The approach adopted is to draw reasonable conclusions flowing from
sound statistical analysis of information obtained by the FTO Office from different sources,
including data held by third parties.
Before proceeding with in-depth statistical analysis, let us start with a simple commonsense
approach. Our experience tells us that people work within their trade. A butcher shop does not
sell cloth but meat to all clients. In an attempt to infer as to whether the same suppliers were
selling different goods for transit to Afghanistan to different clients, the manifest information of
the following three suppliers who have been making supplies to Lunar Products (involved in
large scale smuggling of liquor) was searched:
45
1) DELTA EXPORTS FZE
2) MARINA FOODS CO
3) OPAL SHIPPING SERVICES
Delta Exports FZE had one other client, besides Lunar / ISAF for Afghanistan, the Russian
embassy at Kabul.
BL No. Container Machine
No Importer
Departure
from Gate of
Terminal
Received
by Border
Customs
Border
Custom
Station
CBC
DMCQDXB0012231 MSKU7580061 10718
THE RUSSAIN
EMBASSY
KABUL
10/07/2010
5:19
26/07/2010
11:39 Torkham Nil
Although prima facie it would not seem illogical to assume that import of alcoholic beverages
may have been made by the Russian embassy, particularly after visiting the supplier¡¦s website
(http://deltaexportsuae.ae/beverages_beers.html), the matter would need further investigation
before we finally conclude whether the import was actually made by the Russian embassy or
somebody else misused its name.
Interestingly, Marina Foods Co was found exclusive to Lunar / ISAF, selling only alcohol.
As regards ¡§Opal Shipping Services¡¨, two transit containers (HJCU, 8944416, SECU-2601293)
full with assorted alcoholic beverages imported by Osman Sahebi Ltd, Kandahar, were seized by
Islamabad Police in case FIR No. 179/2009 dated 20 May 2009. After noting that Opal Shipping
Services was active in supplying liquor under ATT to Osman Sahebi, we analyzed our data and
discovered that the same importer had imported 18 more - liquor - containers from the same
supplier during 31 January to 8 May 2009, before his next consignment was seized by Islamabad
Police.
46
Table 7
Details of Liquor Containers Imported by Osman Sahebi Ltd, Kandahar
BL No. Container No. Machine
No.
Importer
name
Departure
from
Terminal
Gate
Received
by Border
Customs
Custom
Station
Where
Received
CBC
JEAKHI6731 MCSU3223460 18302 Osman
Sahebi Ltd 01/31/2009 Torkham 0
JEAKHI6803 MCSU3548718 18303 Osman
Sahebi Ltd 01/31/2009 Torkham 0
JEAKHI6867 MCSU2002295 19241 Osman
Sahebi Ltd 02/10/2009 02/24/2009 Amangarh 0
JEAKHI6947 MCSU2195730 19741 Osman
Sahebi Ltd 02/14/2009 02/20/2009 Amangarh 0
JEAKHI7053 MCSU2192454 20692 Osman
Sahebi Ltd 02/25/2009 03/14/2009 Amangarh 0
JEAKHI7102 WHLU2175251 21094 Osman
Sahebi Ltd 02/28/2009 03/14/2009 Amangarh 0
JEAKHI7152 WHLU2168479 21776 Osman
Sahebi Ltd 03/13/2009 03/21/2009 Amangarh 0
JEAKHI7153 WHLU2176495 21780 Osman
Sahebi Ltd 03/13/2009 03/21/2009 Amangarh 0
JEAKHI7187 WHLU2204977 22265 Osman
Sahebi Ltd 03/17/2009 04/01/2009 Amangarh 0
JEAKHI7303 BCLU2033530 23638 Osman
Sahebi Ltd 03/27/2009 04/16/2009 Amangarh 0
JEAKHI7307 SCZU7475015 23639 Osman
Sahebi Ltd 03/27/2009 04/16/2009 Amangarh 0
JEAKHI7362 BERU2011020 25159 Osman
Sahebi Ltd 04/11/2009 05/04/2009 Amangarh 0
JEAKHI7375 SECU3640750 25160 Osman
Sahebi Ltd 04/11/2009 05/04/2009 Amangarh 0
JEAKHI7448 WHLU2178630 26047 Osman
Sahebi Ltd 04/18/2009 05/09/2009 Amangarh 0
JEAKHI7679 CRXU1346969 28346 Osman
Sahebi Ltd 05/08/2009 05/14/2009 Amangarh 0
JEAKHI7609 SECU1323731 28142 Osman
Sahebi Ltd 05/08/2009 05/19/2009 Amangarh 0
JEAKHI7640 WHLU2093153 28128 Osman
Sahebi Ltd 05/08/2009 05/14/2009 Amangarh 0
JEAKHI7573 TRPU2308993 28134 Osman
Sahebi Ltd 05/08/2009 05/14/2009 Amangarh 0
JEAKHI7740-
1 HJCU8944416 29344 Osman
Sahebi Ltd 05/17/2009 Amangarh 0
JEAKHI7740 SECU2601293 29343 Osman
Sahebi Ltd 05/17/2009 Amangarh 0
Source: FBR
47
In view of poor quality of PRAL data, as shown below, it would not seem illogical to infer that
18 other ¡¥transit¡¦ containers of Osman Sahebi also may have been equally pilfered within
Pakistan. If the Office of Federal Tax Ombudsman can draw such an obvious inference while
analysing data on a lap top, one wonders why such a large workforce and huge resources of FBR
cannot do that.
How can we determine the extent of containers that may have been pilfered in Pakistan under the
garb of Afghan transit? The following analysis will help unravel some of the difficulties involved
in answering this vexed question.
PRAL Data
In response to data requisitioned from FBR for the period January 01, 2007 to October 15, 2010,
PRAL confirmed that Karachi Customs had handled a total of 306,267 transit containers during
this period. After analysing the data, we went into a state of total disbelief. The scandalously
shocking picture that emerges about the quality of PRAL data is evident from the following
Table.
Table 8
Year-wise Status of Transit Containers
Status
Containers
2007 2008 2009
2010
(up to
15 Oct)
Total
No departure, receipt at border station or cross border 40506 16090 10423 4183 71202
Received at border station without departing from
Karachi 1378 10985 11103 4405 27871
Left Karachi but never arrived at border station 18862 17596 10081 8601 55140
Left Karachi, arrived at border station but did not
cross border 767 19895 64600 66792 152054
Total 61513 64566 96207 83981 306267
Source: FBR
48
For 71202 containers there is no information regarding either their departure from Karachi or
their arrival at the border customs stations. In case of 27871 containers that did arrive at the
destinations, their departure information from Karachi is not available. Another 55140 containers
are shown to have left Karachi but have no entries of arrival at the border stations. 152054
containers have records for departure from Karachi and arrival at the border customs station, but
no record of crossing into Afghanistan. Finally, not a single container, out of 306267, is recorded
to have ever crossed over to Afghanistan during the almost four-year period under reference.
As the above results from data provided by PRAL were difficult to believe, the FBR was asked
to recheck the authenticity of its data. In response, CEO PRAL (Annex-U) conceded that while
the above inferences drawn from the data were correct, the data needed to be seen and evaluated
in its proper context. The data did not reflect real time happenings of events, but the feeding of
computers from paper documents after the events, as and when available. The main reason for
inadequacy of data was that the One-Customs system was manual, having no direct interface
with computers. Using a batch processing system, entries were fed into the computers as and
when documents were made available after completion of manual work. PRAL further
contended that the system was inadequate in case of Afghan transit due to issues of infrastructure
and security at the borders. But why there was no record for the departure of 99,073 containers
from Karachi where there were no problems of infrastructure or security was not explained.
After receiving this response, we subjected the PRAL data to further analysis and arrived at
discovering the following incredibly anomalous results.
Table 9
More Anomalies Identified in PRAL Data
Anomaly Containers
No Seal No. shown 110,883
No Record of Date of Departure from Karachi port 99,073
No Record of Date of Receipt at Destination Border Station 126,342
Invalid Container Numbers 9,592
No Name of Consigner 32
Received at Border Customs Station before Departure from Karachi 45
49
Table 10
Containers Received at Border Stations after Inexplicably Long Delays
Time taken between Karachi and Chaman / Torkham Containers
1-3 months 1,811
3-12 months 2,682
1-2 years 10,874
2-3 years 2,221
It is obvious that the FBR¡¦s PRAL data was not at all reliable as to which containers had left the
ports and what was their situation en-route? Which containers had arrived border stations within
time? Which were abnormally delayed and why? Which did not arrive at all? As PRAL data
reflected containers that arrived at border stations even before they had actually left the ports at
Karachi, there was no doubt left that the data had no semblance with reality and no reliance
could be placed on it. We were thus left with no option but to explore for independent sources of
reliable data.
NLC Data
We asked the NLC to provide relevant data on Excel format. Initially, the data we received was
in PDF (Document) format. When pressed that for ease of statistical analysis, data was required
to be provided in Excel format, what we finally got bore no semblance with the prescribed
format. It was data for transport of containers from Karachi to border stations with no container
number, date, time, truck number, etc., either for departure from Karachi, arrival at border
customs-station or cross border. It was a meaningless exercise for our purposes. NLC data was
also a total disappointment.
Data from Terminal Operators
The only meaningful and independent data that we thought we could get was from Terminal
Operators: KICT, PICT and QICT. The data from the Terminals was a preferred choice for the
following reasons:
¡´ For their own commercial survival, the terminals have to maintain accurate data
regarding arrival, discharge, storage and clearance of containers, both dispatch and
receipt, as the terminals bill their clients for the services rendered based on this
information.
50
¡´ Terminals charge storage and demurrage on containers from the clients and have to
maintain accurate records of arrival and departure of containers.
¡´ Terminals have to maintain a high degree of computerization since they have to deal with
international companies like shipping lines from whom they receive bay plan files,
manifest information, etc. They also have to rely heavily on computers for their internal
operations involving planning for loading and discharge of international vessels and for
internal moves and stacking of containers which continues round the clock.
¡´ The terminals use internationally accepted, standard computer systems like NAVIS etc.
as are deployed at other ports around the world.
¡´ KICT (Hutchinson Port Holdings) and QICT (DP World) are part of international chains
operating multiple terminals across the globe. For internal uniformity they use the same
equipment as used at other terminals across the world. PICT, the third terminal, although
not part of an international chain, cannot compete and survive in the world of global
terminal operators unless it matches their standards in automation.
¡´ The terminals are independent of Customs, NLC or PRAL and have no vested interest in
the outcome of this investigation.
Analysis of Terminal Data
Is it possible for a container to leave a terminal from Karachi for a border destination at 10 in the
morning and return back to the same terminal after having dropped its transit cargo at the border
customs-station a few hours later? Our analysis of terminal data takes into account such common
sense impossibilities. After obtaining data of transit containers (destined for Chaman, Amangarh,
Torkham) exiting from KICT, QICT and PICT on Microsoft Excel format, we proceeded to work
out the time taken to complete their round trips to the same terminal.
Before we move further, it is necessary to establish a reasonable timeline in which containers can
possibly do a round trip of Chaman, Amangarh or Torkham, as the case may be. We have
interviewed many clearing agents, transporters and drivers for the purpose. Based on these
interviews we have summarised the various activities involved in transit trade from receiving
pre-alerts to departure of the container for the border station to return of the container back to the
terminal.
51
Table 11
Time Taken in Completing a Round Trip by ISAF / NATO Containers
Day Activity
-- Pre-alert received by Clearing Agent along with BL, Packing List, Invoice & Exemption
Letter from Consignee (ISAF) after the vessel starts sailing from the foreign port.
-4 Vessel arrival at Karachi ports, vessel discharge, IGM/Index filed by Shipping Line.
-3 ISAF¡¦s cargo manifest issued by ISAF signatory, documents submitted to Customs, NLC
for processing.
-2 Undertaking by NLC to transport transit goods, documents submitted in Customs for G.D.
process and verification etc.
-1 Customs clearance formalities completed.
1 Port charges & all other relevant payments made. Container is dispatched from Karachi
ports.
5 Container reaches border-station (4 days transit time for Peshawar; due to Khojak Pass 3-
4 days for Chaman).
6-7 Border clearance. (Maffi Khat processing with Afghan Ministry of Finance and Ministry
of Foreign Affairs takes time.)
8 Border crossing & dispatch
9 Clearance at Kabul / Kandahar Custom House.
10-11 Arrival at destination, waiting period may vary according to queue of already waiting
vehicles, de-stuffing of cargo.
12-13 T1 Afghan Border Customs Document to be stamped by Consignee for return of empty
container.
14
T1 form submitted to Kabul / Kandahar Custom House. An electronic confirmation is sent
from Kabul / Kandahar land customs to the border (until this confirmation is sent to the
border, the truck cannot cross back into Pakistan).
18 Container arrives back to the Shipping Line at Karachi.
As the above Table shows the US / ISAF / NATO containers go right up to Kandahar or Kabul,
as the case may be, taking 16-18 days to complete their Karachi-Afghanistan-Karachi round trip.
However, as we have not as yet received tangible evidence of serious wrongdoing on the part of
US / ISAF / NATO, in relation to transit cargo, and also as we have still to receive reliable data
from Afghan / US / ISAF authorities to firm up our conclusions on this aspect, we are confining
our present investigation only to Afghan transit trade, including of course cases where name of
ISAF / NATO has been misused for ulterior motives.
52
Table 12
Time taken in Completing Round Trip by Commercial Transit Containers
As cross border is not relevant to transit cargo that is pilfered within Pakistan before it crosses
the Pak-Afghan boundary, we will for the purposes of this investigation restrict ourselves to the
time a transit container takes to complete Karachi-Border Station-Karachi round trip. As
indicated in Table 12, the estimated time a transit container takes to complete a Karachi-
Peshawar-Karachi round-trip is 11 days. It could be 9-10 days for Karachi-Chaman-Karachi
round trip. It may be relevant to mention here that 70% of transit containers take the Karachi-
Peshawar route and only 30% take to Chaman.
In our interviews with transporters and lorry drivers, we discovered that an 11-day Karachi-
Peshawar-Karachi round trip would be considered fast, a 10-day return exceptional and a 8-day
return impossible. (We were told that Karachi-Chaman-Karachi route though shorter in distance
would take about the same time due to the Khojak Pass.)
For cross validation of cut-off time, we looked at FIR No.360 / 2010 of Police Station Shalimar,
Islamabad. In this case a transit container (No. GLDU-3627994) laden with liquor (13077
bottles, 13200 tins) had left KICT on 24 June 2010 at 19:39 and reached Islamabad on 30 June
2010 at 09:25 when it was seized by the police. In other words, the container took over 5-and-ahalf-
days to reach Islamabad from Karachi. If it were a bonafide transit container, it would have
Day Activity
-- Pre-alert alongwith BL, Packing List, Commercial Invoice, Jawaz Nama, etc received by
Clearing Agent after vessel starts sailing from a foreign port.
-4 Vessel arrival at Karachi ports, vessel discharge, IGM/Index filed by Shipping Line.
-3 G.D. is manifested through e-filing, submitted to AT Group, after processing GD is signed
out of charge, allow loading endorsed on GD.
-2
Delivery order is taken side by side from shipping company on payment of dues and then
apply for undertaking from NLC along with one set of documents for transportation from
Karachi to Peshawar/ Chaman.
-1 Custom clearance formalities completed.
1 Port charges & all other relevant payments made. Shipment is dispatched from Karachi
ports.
5 Container reaches the border customs-station (4 days for Peshawar and 3-4 days for
Chaman).
6-7 De-stuffing of cargo (if the container goes to Kabul / Kandahar, 3-4 more days).
11 Return of container back to Karachi. (More days if cargo is collected en route to Karachi.)
53
not returned to Karachi, after de-stuffing at Amangarh, in less than 13 days. It is clear that
estimated 11-day round trip is for a rather fast return.
If we look at Table 4, we notice that of 26 transit containers involved in the Louis Berger scam
one-half returned to the terminal full with export cargo. (About 35% transit containers while
returning to their respective terminals are full with export cargo.) Almost 40% containers
involved in the scam returned to the terminal between 9-24 days. If we work out mean time taken
to return to the port by the containers involved in the Louis Berger scam, it comes to 9.16 days.
Despite overwhelming evidence suggesting that minimum time a transit container requires to
travel to the border-station and back to the same terminal is significantly more than 8 days, for
the purposes of this investigation we have consciously kept it at 8 days. There is no way that a
container can do a round trip in less than 8 days, after de-stuffing its cargo at the border-station.
Table 13
Time Taken on Karachi-Border Station-Karachi Round Trip
Round Trip
Completed
within
Containers
2007 2008 2009 2010
(up to 15 Oct) Total
1 day 0 4 6 1 11
2 days 0 7 16 6 29
3 days 1 12 24 17 54
4 days 15 31 43 39 128
5 days 92 138 121 143 494
6 days 356 386 357 685 1784
7 days 983 825 1017 1740 4565
8 days 1613 1388 1894 3027 7922
9 days 2133 1940 2914 4642 11629
10 days 2614 2518 3937 6245 15314
11 days 3049 3066 4938 7793 18846
12 days 3401 3557 5946 9031 21935
Source: Terminal Operators
As the above Table shows, 11 containers incredibly returned to the terminal the same day, after
discharging their transit cargo at the border stations. Another 29 containers ¡¥completed¡¦ the job
within 2 days, 54 in 3 days, 128 in 4 days, 494 in 5 days, 1,784 in 6 days, 4,565 in 7 days and
7,922 containers ¡¥did¡¦ it in 8 days. Thus during the past almost four years at least 7,922 transit
54
containers, based on a 8-day cut-off time, never made it to the border stations and entered the
(same) terminal empty after discharging their cargo en-route. A large proportion may have done
so without even leaving Karachi.
The data in Table 13 is also significant in that it indicates a sharp rise in the trend of transitrelated
pilferage. While the number of transit containers doing the impossible task of returning to
Karachi within 8 days rose by 36% in 2009 as compared to 2008, it rose by 60% in 2010 (up to
15 October) as compared to 2009. Interestingly, the statistically established trend broadly
confirms what we learnt in our interviews with the knowledgeable people.
Our estimate is obviously much on the conservative side as it does not include containers that
may have been part of the scam but could not make it within 8 days or may have never returned
to the port, let alone the same terminal. Other reasons could include waiting for fresh cargo at the
Shipping Line¡¦s yard, an emergency en-route or even a deliberate wait to avoid possible
suspicion by Customs / port authorities. The actual number of containers involved in transit
scams may therefore be much higher.
If we extrapolate on the basis of seemingly more probable 10-day cut-off time, the number of
transit containers being pilfered would be 15, 314, as indicated in Table 13.
It may also be noted that our estimate is only for containers covering transit trade. It does not
take into account the huge volume of other clearances which are ¡¥managed¡¦ on daily basis by
evading duties / taxes through ubiquitous mis-declarations. Nor does it cover goods imported
under ATT that are smuggled into Pakistan after the cargo has crossed over to Afghanistan.
As regards the incidence of duty evaded, we have worked out tentative rates / container for
different smuggling-prone items. These rates have been worked out with the help of experts in
the field, as also taking into account the duties and taxes adjudicated in recent seizures.
It may be noted that determination of Customs Value depends on many variables like date of
import, quality and quantity of goods, exchange rate. Amounts of Customs duties and taxes are
calculated on dutiable value determined by Customs and leviable rate of duty and taxes on the
date of import.
55
Table 14
Estimated Incidence of Duty / Taxes on Major Items Smuggled
through Afghan Transit Trade in a 20-feet Container
Sr. No. Item Duty and Taxes
(in Rupees) Sr. No. Item Duty and Taxes
(in Rupees)
1 Tyres 800,000 10 DVD player 3,200,000
2 Fabric 900,000 11 Cheese 4,100,000
3 Tea 1,500,000 12 LCD TV 4,200,000
4 Mobile charger 1,000,000 13 Perfumes 7,000,000
5 Motorcycle auto
parts 2,000,000 14 Menthol 2,000,000
6 Auto parts of cars 2,400,000 15 Small cardamom 1,400,000
7 Mobile battery 2,000,000 16 Panaflex sheets 2,100,000
8 Coaxial cable 3,000,000 17 Ball bearing 2,700,000
9 CDR/DVDr 3,100,000 18 Alcohol 8,000,000
Average per container = Rs.2,850,000
Although it makes business sense to smuggle top-tariff goods, we have worked out the incidence
of duties and taxes @ Rs.1.5 million / container (20-feet) on 7,922 transit containers (taking 60%
containers as 40-feet and 40% as 20-feet) at Rs.19 billion for the almost four-year period under
reference. The amount appears to be on lower side against the generally held perception that of
US$ 2 billion annual ATT trade through Pakistan at least 20% of it, comprising generally of
high-tariff items, was not crossing over to Afghanistan. For 15,314 containers the evaded duty
and taxes would work out to Rs. 37 billion for the same four year period.
While evaluating the available data and determining impact of the pilferage we have exercised
extreme caution in arriving at our estimates. Even when physical impossibility of completing a
round trip in less than 8 days was substantiated by hard data, the results were again tapered to
avoid even the slightest possibility of arriving at inflated extrapolations.
56
Chapter 6
CONTROLLING CONTAINER SCAMS
Diagnosis before Cure
Unless the disease is accurately diagnosed, it will not be possible to administer effective cure.
The previous chapters have demonstrated that astronomical amounts of quick and easy money
can be made by those who plan and execute schemes to beat the import processes and evade the
revenue of the State. There is no dearth of such individuals within and outside the Department.
No wonder that the scams have continue unabated.
To change the conditions prevailing in the Customs Department, it is necessary that the disease is
effectively controlled. But before suggesting appropriate countermeasures, a proper
understanding of the disease that confronts us is critical.
Understanding the Disease
There is an environment where dubious customs officials, clearing agents and businessmen
collude with each other on frequent basis. In a world dominated by white-collar crime, the
syndicates use expertise, knowledge, financial resources and contacts to hatch plots to loot the
biggest bank of the country, the state treasury. Once partnerships, rights, obligations, roles and
responsibilities are decided, it is time for unleashing a new scam.
The basic enabler of scam-prone environment in the largely manual and predictable customs
system is what is called ¡¥group¡¦. Each group is headed by an official of customs called Principal
Appraiser, assisted normally by 4 assistants called Appraisers. The Harmonized System of
Customs which codifies and enables international trade comprises of 97 chapters, and each
¡¥group¡¦ handles valuation / assessment of cargo falling in roughly 10 chapters. In addition, there
are heads of other groups such as Car Section, AIB, Afghan Shed, Licensing Section. It is rare
that a Principal Appraiser or an Appraiser is transferred from the city where he starts his career.
They are the permanent fixtures of the landscape, the movers and shakers of the world of
Customs. The higher ranks of Customs bureaucracy, the ACs, DCs, Collectors come and go.
The creation of ¡¥groups¡¦ creates the predictability that is necessary for any scam to work. When
it is possible to predict exactly the official who will handle a case in a particular set of
57
circumstances, the next step is simply to associate that official in the game. If crime is to be
effectively monitored in Customs Department, the best bet is to monitor certain ¡¥groups¡¦,
particularly their heads, the Principal Appraisers. It would be interesting to study who the PAs
and their seniors were who handled the clearance of cargo involved in mega scams, particularly
from 2007 to 2009. It would also be interesting to analyse who these PAs were ¡¥connected with¡¦?
However big a tree may be, its food still comes from the roots. The ¡¥groups¡¦ are the roots for
collection of the ¡¥food¡¦, which is then distributed to the higher branches of the Customs tree.
The first step towards controlling scams in Customs must therefore be to strike at the roots. We
must dismantle the ¡¥group system¡¦ of Customs, for this is the breeding ground where all
¡¥schemes¡¦ are hatched. The way forward is automation where machines make decisions instead
of ¡¥groups¡¦. If a decision is beyond the capability of the machine, the matter automatically would
go to the officials on duty in a random fashion, keeping the identity of the importer hidden all the
time. This explains why introduction of a faceless Customs system is vehemently opposed by the
unscrupulous within the Customs Department, as also the corrupt importers.
The Customs manual system thrives on (1) personal contact between the taxpayer and the tax
collector, (2) complexity of clearing processes, and (3) wide discretion in the hands of Customs
officials. It suits the vested interests to resist any effort that aims at simplifying business
processes, bringing transparency, reducing contact between taxpayer and the tax collector,
minimising discretion and bringing accountability.
Side by side with the One-Customs manual system is the fully automated PaCCS. The existence
of two parallel systems has created avoidable debilitation within the Customs Department. At
least when PaCCS started in 2005, it had to face a lot of resistance from within. It is time that an
independent system audit is conducted of the One-Customs system and, after taking into account
independent reviews / audits of PaCCS, instead of two rival systems, only one standard system
dealing with all Customs operations across Pakistan is finally established.
Legal and Environmental Issues
It may seem strange that the definition of smuggling does not include diversion of transit goods
to Pakistani markets before these goods cross over to Afghanistan. Nor does the Customs law
explicitly include all persons making a living out of any type of fraud or irregular activity related
with transit trade, whether involved directly or otherwise, within the scope of smuggling. Once
58
the transit goods are found to have been diverted within Pakistan, the onus of proving innocence
should shift to the accused. It should be obligatory for any person having knowledge or
information of any transit-related suspicious activity to immediately inform the Customs
authorities, failing which he should be treated as having aided the commission of crime of
smuggling.
As evasion of duties and taxes is more serious a crime than theft - whereas theft causes major
harm to individuals, tax evasion is a crime against the whole nation and the State - the statutory
definition of theft is incomplete and should include ¡¥tax theft¡¦ as well. In this section an attempt
is made to examine the extent to which Customs law, its administration and the various appellate
procedures have succeeded in influencing an individual tax evader¡¦s calculus of duty evasion.
Does the ¡¥fight¡¦ against duty evasion rank high enough in terms of national, even organisational
practices? Is FBR capable of deterring tax evaders? What are the possible lines of future reform?
Although crime in general does not appear to be very susceptible to deterrence, it looks prima
facie as if tax evasion, being deliberately planned, might react favourably to a higher evasion
control profile. The conventional theory on the economics of crime finds it convenient to
disaggregate deterrence into two constituent elements: (1) the probability of detection, and (2)
the severity of punishment meted out in detected cases. With regard to tax evasion, the general
thrust of argument seems to be that raising either the detection probability or the penalty regime
will reduce evasion. While bringing about substantial improvement in the quality, integrity and
professionalism of Customs officials, for enhanced detections, may not be easy, particularly in
the short term, raising the fine (which is virtually the only, though infrequently, awarded
¡¥punishment¡¦ as far as the offence of tax evasion in Pakistan is concerned) appears relatively
costless. The two parameters, however, are required to be set with great care lest one ends up
suggesting some pretty strange results, e.g. a policy of ¡¥hang tax evaders with detection
probability zero¡¦. Conversely - even though it is not so much the severity of punishment as an
improvement in detection probability which appears to have a greater deterring influence ¡V a
high probability of detection per se will not be able to deliver the goods if the penalties levied are
only nominal in terms of the values of those sought to be deterred. Before examining the issue
any further, an overview of the existing penalty structure, in theory as well as in practice, seems
appropriate.
59
The penalty structure: theory and practice: The penalty provisions under the Customs Act,
1969, are covered in chapter XVII: Offences and Punishments. Offences pertaining to omissions
and commissions are handled - administratively - by Customs authorities, whereas the offence of
smuggling carries imprisonment ranging from 5-14 years after trial by a special judge.
(Smuggling of narcotics carries life imprisonment, even death penalty in specified cases.)
Whereas in theory the relevant penal provisions in Pakistan¡¦s Customs code seem to be quite
stringent, the whole exercise of having such stiff penalties on the statute book looks like a
charade, the moment one examines closely ¡V both qualitatively and quantitatively ¡V the
¡¥punishments¡¦ which are actually handed out. Not only is the extent to which Customs
authorities are able to achieve what we might term prima facie detection of tax evaders or their
abettors abysmally poor, the real rate of detection is much less when one looks at a very large
proportion of cases which are labelled as ¡¥mis-declaration cases¡¦ but are not so held as they pass
through the appeal stages. Given the perceived insignificantly low rate of detection, the ubiquity
of tax evasion seems hardly surprising. When it comes to penalties, the picture is not any
different. Indeed, if one of the purposes of penalty provisions is to deter tax evaders, both
individually (in the sense that those found guilty should find it distasteful to do the act again) as
well as generally (the punishment is perceived so awful that others feel compelled not to do such
an act), the extent to which this purpose can be achieved in practice depends largely on the
number of tax evaders known to have been punished actually. The larger the dark figure of tax
evaders, the lower the deterrence effect of penalties, however, severe.
As regards prosecution and punishment of tax evaders, it is often suggested that in the field of
tax evasion, criminal sanctions, and jail sentences in particular, are of significant value as
deterrents. The probability of prosecution is indeed very highly correlated with the tax evader¡¦s
¡¥evasion mentality¡¦. However, whilst the prospect of landing in jail can have a much greater
deterrent effect in principle, it does not have much effect de facto if the perceived and actual
probability of prosecution and / or imprisonment is virtually zero.
Among the many reasons of virtual absence of deterrent effect of ¡¥punishments¡¦ handed out to
tax evaders is the incredibly long time it takes to finalise the criminal proceedings. If it takes
years before the process is finally concluded, it erodes whatever deterrence the sentencing
process may potentially entail. There is need to have specialist tax benches in High Courts as
60
also in the Supreme Court to provide focus and speed to tax cases in general and Customs cases
in particular.
Containing the Disease
While there have been a few periodic ¡¥outbursts¡¦ concerning public policy toward smugglers, the
rhetoric has yet to be turned into practice. The successive governments in general and the
chairmen of FBR, in particular, have lacked the necessary will both to muster enough political
backing in favour of tax compliance, especially in cases involving the ¡¥big fish¡¦, and to control
corruption within the tax hierarchy, which in turn helps the tax evaders to ¡¥buy their way out¡¦.
Indeed the control of tax evasion is critically linked with the ¡¥ability¡¦ and ¡¥integrity¡¦ of Customs
officials in terms of both their requisite skills and levels of corruption. To ensure enhanced levels
of detection, not only should the skills required to unearth tax evaders be substantially improved,
but, as far as practicable, complex cases of tax evasion should be dealt with by teams of
specialist investigators.
It is also critical that the FBR leadership sends out a strong and clear message that there will be
zero tolerance for corruption, whoever may be involved in it. The leadership will have to set a
personal example and show commitment that it is really serious to contain the disease. Also, the
scams that have occurred in the recent past will need to be thoroughly investigated under an
independent oversight mechanism. The Office of the Federal Tax Ombudsman has a statutory
responsibility to ensure not only that large tax scams are prevented but also that the perpetrators
are effectively brought to justice. The fact finding committees set up by FBR during the last four
years in major container scam cases were, at best, exercises at damage control and providing
cover-ups rather than a genuine effort to fix responsibility or suggest effective countermeasures.
Those responsible for the scams and those responsible for providing cover up to the real culprits
ought to face the consequences, while those with a proven track record for efficiency, honesty
and performance be given due recognition, the sooner rather than later.
Structural Issues
If the tax to GDP ratio does not increase significantly, Pakistan cannot be
governed effectively, essential public services cannot be delivered and high
inflation is inevitable. Reform of tax administration is the single most important
economic task for the government.
61
Report of the Task Force on Reform of Tax Administration, 2001
Reforms of tax policy and administration are among the most crucial economic
reforms for Pakistan. Pakistan's tax to GDP ratio at around 10 per cent is among
the lowest in the world, severely jeopardizing national goals of reducing poverty
and increasing and improving vital public services such as healthcare, education,
and infrastructure. Moreover, the structural weaknesses of the tax system have
heightened Pakistan's vulnerability to economic shocks.
Yusupha Crookes, World Bank Country Director for Pakistan
While efforts aimed at combating the ¡§perceived defects in the inherent character of the Customs
personnel¡¨ need to be continued with more vigour and commitment, it is important to realise that
most attempts in this regard, such as improving values and attitudes, firing people, etc, yield only
limited results. More energy and resources should therefore be spent on reengineering the
environment in which Custom Officials operate. Using IT as a main tool, the goals of the effort
should be to attain the following:
¡E ¡§Full automation of the processes thereby reducing human interventions
significantly.
¡E Repositioning of controls to where they are most effective without
obstructing business and trade.
¡E Provisions of remote lodgement facilities (via a computer network), to
enable the public interact with the organisation from their offices,
removed from face to face interactions.
¡E Complete paperless and cashless processes.
¡E Privatisation of certain operations.
¡E Electronic linkage of all the participating agencies in the system.
¡E Use of clear and simple rules.¡¨
Report of the Task Force on Reform of Tax Administration, 2001
In 1994 the FBR set up its own private limited company called Pakistan Revenue Automation
(Pvt.) Limited (PRAL) with the declared intention to introduce computerization and paperless
environment. However that has not happened as yet. At best PRAL¡¦s computerization is a digital
62
diary process that captures completion of various steps in the business process, after an event
handled manually is over. In practice, relevant entries have not been entered into the system for
years. Nor has any independent system audit of PRAL been conducted ever since its
establishment. A further glimpse of the abysmal quality of data we received from PRAL during
the course of this investigation is indicated in the following Table.
Table 15
PRAL Data Analysed for a 12-Day Round Trip
Anomalies Noted Containers
No record of date of receipt at border customs station 5,384
No record of date of departure from Karachi 2,484
Neither record of date of departure from Karachi nor record of date of receipt at
border customs station 1,867
Received at destination border station within 24 hrs of departure from Karachi 13
Received at border station before departure from Karachi 20
Received at border customs station
After 25 to 99 days 1,032
After 100 to 199 days 585
After 200 to 299 days 395
After 300 to 399 days 443
After 400 to 499 days 637
After 500 to 599 days 204
After 600 to 699 days 195
After 700 to 799 days 141
After 800 to 852 days 32
Not received at border customs station after Gate-out from Terminal
For 30 to 99 days 90
For 100 to 499 days 360
For 500 to 999 days 1135
For 1000 to 1425 days 3794
Received at border station when the container had returned to Terminal
1 day before 281
1 to 9 days before 788
10 to 99 days before 1273
100 to 199 days before 594
200 to 299 days before 355
300 to 399 days before 467
400 to 499 days before 681
500 to 599 days before 174
600 to 699 days before 186
700 to 799 days before 136
800 to 850 days before 39
63
It is apparent that the system is a complete mess. PRAL has no information about cross border
into Afghanistan of thousands of transit containers. The solution lies in having one standard
computerised system, after an independent audit of data held by PRAL.
Unlike a number of other countries (e.g. USA, UK, India), we have only one organisation
(Federal Board of Revenue) charged with the responsibility of administering both direct and
indirect taxes. There could be a number of reasons why a separate set up for the ¡¥care and
management¡¦ of Customs might be helpful with regard to control of container scams. First, it
will lead to more focus at the highest level on what ails the administration of Customs. Second,
an organisation exclusively dealing with matters connected with the administration of Customs
should be able to improve its standards of management. Third, the reorganisation will lead to
more specialisation. Last but not least, through better supervision, two separate organisations
will help reduce tax evasion in both. However, if the political judgement continues to be in
favour of the single Board, it is important that a new post of deputy chairman is created and
filled by a senior, competent and honest officer from within the Pakistan Customs Service. While
designating him as head of the Customs Department, the deputy chairman should be given
functional autonomy and his independence more fully and unambiguously guaranteed.
In a restructured FBR, the Intelligence and Investigation Wing would form the backbone of the
whole edifice of the Customs Department. The intelligence gathering function would involve
both collection and matching of as much information about the existing and potential tax evaders
as is possible within the limits of law. Indeed, the effectiveness of the Intelligence and
Investigation Wing in combating tax evasion will depend substantially, on the one hand, on its
capacity and capability to process and analyse large volume of data and on the other to be able to
unearth syndicates of organised tax evaders and the compliant Customs officials.
Administrative Issues
What is intriguing is the fact that people at senior levels both within the Customs administration
and FBR knew prior to May 2010 (ISAF Container Scam) that a large number of containers in
transit to Afghanistan were actually being pilfered within Pakistan, but they remained
complacent about the whole affair. The Customs Intelligence detected the ¡§Louis Berger Scam¡¨
as well as the ¡§165 Container Scam¡¨ during mid 2008. The FBR administration clearly knew
through the statements of the accused arrested in the cases64
¡E that One-Customs system was more prone to misuse to clear consignments from the
port;
¡E that using ISAF¡¦s name was a convenient vehicle to take the goods out of the port;
¡E that commercial ATT cargo was being disguised as ISAF¡¦s;
¡E that large number of ATT containers after clearance from the port were being pilfered
within Pakistan;
¡E that declarations initially filed in One-Customs were subsequently being deleted; and
¡E that thousands of containers were not being received at the destination.
By about the same time, a strange phenomenon was observed: 364 transit containers cleared at
KICT between June 2006 and April 2008 returned to the terminal, after a discharging their cargo
in Afghanistan, within impossibly low time span of 8 days. Similarly, 58 containers in transit to
Afghanistan from September 2007 to April 2008 returned to QICT within less than 8 days, in
some cases even within hours of leaving the terminal. There was only one inevitable conclusion,
the containers were not going to Afghanistan but were being pilfered within Pakistan, probably
in Karachi, not without express or implicit connivance and knowledge of concerned officers.
However, no appropriate action was taken against those involved in the scams. Nor were any
effective countermeasures put in place to prevent recurrence of such organised frauds.
Strangely, when asked what action was taken by the FBR against the officials involved in the
scams or other kinds of wrongdoings, the FBR expressed its inability to provide the relevant
data, notwithstanding that refusal to provide information that in the opinion of the Federal Tax
Ombudsman is relevant to correct determination of a matter under investigation before him
attracts punishment under Section 16 of the Establishment of the Office of the Federal Tax
Ombudsman Ordinance, 2000. As it was felt inappropriate to delay this report for want of data,
necessary proceedings under the law have been separately initiated against the concerned FBR
functionaries.
A Summing Up
The scope of definition of smuggling needs to be appropriately enlarged. To what extent the
Customs law is producing any general deterrence is difficult to determine. The paucity of
adequate database, concerning both the nature of administratively awarded monetary penalties
and the ultimate fate of these penalties, permits no firm conclusions. If, for the tax evader, the
65
chances of detection are few and far between, the likelihood of his prosecution / imprisonment is
even more remote.
Why is the rate of detection so low? Whilst the legal provisions with respect both to the
investigative powers of Customs officials and to imposing statutory obligations on importers do
not appear to be seriously inadequate, the problem seems to stem largely from ineffective
implementation of law, due to shortcomings of Customs personnel and because of the out-moded
and ineffective organisational framework in which they operate.
The same, by and large, is the explanation both for the low rate of monetary penalties and even
lower prosecutions. Indeed, a vigorous (and successful) prosecution policy with regard to top tax
evaders should form a far more important plank of the enforcement activity of the Customs
Department.
To combat widespread smuggling, what is needed urgently is a comprehensive reform package,
coupled with the will to enforce tax laws justly and effectively, without fear or favour to
anybody, however big or well connected. Only then will we be able to make a contribution
towards the goals of raising revenue for our hard-pressed State and achieving a greater sense of
political and administrative legitimacy and social justice.
66
Chapter 7
CONCLUSIONS AND RECOMMENDATIONS
In its capacity as the national revenue collecting authority, the FBR has a prime and pivotal role
in the governance structure of Pakistan. The taxes collected by the FBR in the shape of Customs,
Federal Excise, Sales Tax and Income Tax provide the essential resources to the government for
spending on vital public services, poverty reduction, education, health, critical infrastructure and
defence. The performance and conduct of about 24,000 personnel employed in the FBR critically
impacts the economic well being of the 180 million people of Pakistan.
Sadly, the FBR lacks the effectiveness it needs and is perhaps the most loosely monitored
organization of the country. It practically governs itself since it has the unique advantage of
pushing all its legislation through the Parliament in the shape of Finance Bills, with minimal
debate. As FBR¡¦s work is considered to be of technical nature, public understanding is low. In
terms of attitudes and organisational practices, FBR is still in the 19th century colonial mode.
The Tax to GDP ratio of Pakistan at around 9% is one of the lowest in the world. The increasing
chasm between the rich and the poor, the crumbling infrastructure, the meltdown of economy
and lack of spending in vital services has made the country almost ungovernable and the FBR
cannot escape its due share of responsibility. While the life styles of the employees of FBR are
envied, the citizens and businesses loathe pervasive corruption, non transparency, too much
discretion and lack of accountability of the tax collectors.
Among the departments of FBR, while Customs is perhaps the most notorious, it is also the most
critical. It is the first arm of the state that interacts with raw materials entering the country and is
also the last arm of the state that interacts with the finished products leaving the country. As a
bracket around the economy, the inefficiencies of Customs drag the whole economy down.
While our industry suffers under the oppressive, needlessly complex and less than taxpayerfriendly
extractive whims of Customs officials, our local markets are awash with foreign goods
that are smuggled into the country without payment of due duties and taxes. Smuggling while on
one hand deprives us of the much-needed revenue it also takes away the livelihood of our people
by leaving the local industry unable to compete.
67
A culture of corruption, where officials consider illicit gratification their inherent right and force
the law abiding to adopt tactics of the unscrupulous in order to survive has become the norm of
the land. The poison of ¡§speed money¡¨ has ensured that the government departments have a
vested interest in deliberately being inefficient, and in creating and enforcing non transparent,
cumbersome, time-consuming and complex laws and processes. These processes which are
presented to policymakers as instruments for better control are in reality designed to ensure that
the law abiding are forced to yield to the maximum extractive demands of the officials, while the
unscrupulous encouraged colluding.
The recent scams in customs highlight the fact that despite apparently elaborate documentation
and procedures, through which law-abiding importers are forced to pay millions in graft and
corruption, the containers of those acting in cohorts and partnerships with the officials kept
slipping out with extreme ease and impunity, over and over again. Even when the cases were
detected the enquiries held were mostly superficial and shoddy. The real black holes were not
exposed, nor were the real culprits brought to justice.
We have set into motion clear actions that will mark the beginning of a new era in the Customs
Department, an era of accountability, transparency, efficiency, facilitation.
The container scams are works of organized syndicates that have their roots inside the
Department. Billions of revenue due has been evaded due to connivance and corruption of the
officials concerned. These scams cannot be stopped by taking piecemeal measures. Federal
Board of Revenue and especially the Customs Department are in dire need of systemic reform
and restructuring. Fundamental changes are required in the administration, legislation, business
processes and how to use information technology. Unfortunately, the normative value system of
the Department is strongly resistant to fundamental improvement that is urgently needed. It is
protective of the vested interests that have virtually taken control of the Department. As change
is necessary and in the best interest of the country we cannot afford to lose more time to bring it
about. It is primarily for the new leadership of FBR to take the required steps in order to achieve
the desired results. The new chairman FBR has got a rare opportunity to use his vast knowledge
and experience for reinventing the Department.
Fortunately, the direction of reform is quiet clear, due to detailed work already done under the
Task Force of Tax Reforms Report 2001 and the Customs Administrative Reforms (CARe)
68
2002. The trade facilitation strategy has also been finalized by the Ministry of Commerce as a
result of Pakistan Electronic Trade (PAKET) Report, 2006, with detailed scope of work and
major milestones already in place. All that is required is to overcome is the resistance to change
from within the Department.
Recommendations
Short Term Measures
The following measures are recommended for the short term to be initiated immediately and
completed within the next 90 days. Although the concepts are intertwined and overlap yet for the
purposes of clarity the recommended steps are categorized into administrative, technological and
legal measures.
Administrative Measures:
1. Independent investigations to be overseen by the Office of the Federal Tax
Ombudsman shall be held in the following mega scams to determine their causes, to
fix responsibility, and to suggest appropriate countermeasures in order to prevent
recurrence of such scams in future.
a. ¡§Louis Berger Container Scam¡¨
b. ¡§165 Container Scam¡¨
c. ¡§Manifest Container Scam¡¨
d. ¡§Lunar / ISAF Container Scam¡¨
2. Investigation also to determine why senior officers of the Department failed to
perform their duty despite advanced knowledge that the containers were returning
from Afghanistan in impossibly low time spans.
3. To determine the extent of revenue that has been lost over last 4-5 years through
pilferage of consignments without payment of duties and taxes, the following steps are
necessary:
a. Forensic audit of the One-Customs system
b. Reconciliation of containers between ports and customs
69
4. A system audit of PRAL to determine the efficacy of the system.
5. There should be one stand alone Collectorate dealing exclusively with all transit and
transhipment cargo.
6. Urgent steps to be initiated to strengthen the Intelligence and Investigation Wing of
the Customs Department.
7. Tools need to be developed for effective monitoring of Customs officials known to be
living beyond known means.
Technological Measures
In order to ensure that containers may not be pilfered in Pakistan while in transit to
Afghanistan, the following process is recommended:
1. Risk management of containers
All containers to have security seals with RFID tags, and GPS-enabled capability to
monitor content tampering of cargo.
2. Transportation of containers
a. No carrier shall be allowed to transport transit cargo unless it has license of a
bonded carrier with valid bank guarantee deposited with customs to cover the risk of
pilferage. No monopoly or first right of refusal to be available to any entity doing
transportation of transit cargo.
b. All bonded carriers shall be required to install modern state-of-the-art tracking
system on their transport vehicles. In case of HMT, the same requirement shall be
fulfilled.
c. No licensed bonded carrier shall be allowed to transport transit cargo on any vehicle
which is not registered with Customs either as his self-owned fleet or as HMT. The
registration number of all such vehicles must be available with the system and other
than registered vehicles, transit cargo not be allowed to be transported on any other
vehicle.
3. En route monitoring
a. Containers will be effectively monitored en-route, initially through the four check
posts that have been set up for the purpose. The check posts will have readers
70
installed for real time monitoring of containers, and transmission of data to Customs
central control room.
4. Receipt of containers at border customs-stations
a. The transport unit on which a container is loaded at Karachi shall take the container
to the border station at Chaman or Torkham. No cross stuffing shall be allowed en
route except in case of accident or genuine emergency.
b. When containers are received at the border customs-station, the readers installed
there will automatically record its arrival and cross over into Afghanistan. Container
will also be automatically photographed and the picture fed into the system as
evidence of its crossing over to Afghanistan
Legal Measures
Necessary changes in law and procedural framework to be initiated / effected in order to
enhance deterrence against tax evaders and their accomplices.
Midterm Measures
1) In stead of two parallel systems, the Customs to establish one standard fully automated
customs clearance system for whole of Pakistan.
2) The proposal for a separate Board administering Customs duties / management and care
of imports / exports is required to be examined in depth. If it is not agreed to, a competent
and honest officer may be appointed as deputy chairman of FBR from within the Pakistan
Customs Service.
Long Term Measures
Container scanners to be installed at border customs-stations. When declarations are filed, the
system will select up to 5% of the containers through a risk management system. The selected
containers will be scanned at the ports before departure and the scan image will be transmitted in
real time to border customs-stations for comparison purposes.
71
Chapter 8
ANSWERS TO SUPREME COURT QUESTIONS
Question 01: Is the mechanism for transportation of goods under Afghan Transit Trade
Agreement or any other identical instrument sufficient to prevent smuggling inside the
country?
Answer: The mechanism for transportation of goods under Afghan Transit Trade
Agreement or any other identical instrument is not at all sufficient to prevent smuggling inside
Pakistan. The investigation conducted by the Office of Federal Tax Ombudsman shows that
transportation system is one of the weakest links in the transit trade mechanisms of Pakistan. Enroute
diversions, off-loadings and replacements are a frequent phenomenon indeed. Under
ATTA Pakistan Railways was the only authorized carrier for transiting goods to Peshawar /
Chaman. Subsequently, NLC was added as a ¡¥bonded carrier¡¨ to carry transit goods to
Amangarh, Nowshehra / Chaman. The transit cargo in both cases was de-sealed and reloaded on
Afghan trucks under fresh seals. The ECC in 2002 assigned the role of central coordination
agency for arranging logistics for transportation of cargo pertaining to the humanitarian and
rehabilitation programme in Afghanistan to NLC. As NLC did not have the requisite number of
trucks, it started authorizing private sector transporters to do the job instead. The practice
deteriorated overtime to the extent that NLC stopped using its own fleet for ISAF transit. It even
stopped using Hired Mechanical Transport (HMT) for the purpose and instead started the
malpractice of authorizing private sector transport on payment of service charges. As reported by
Pakistan International Freight Forwarders Association (PIFFA), initially the rates of service
charges were lower, but over time these were raised to Rs. 33,000 to Rs. 38,000 per 40-feet
container. Also, as a bonded carrier under SRO 450(I)/2001 dated 18.06.2001, NLC was well
aware of the requirement of transporting transit cargo on vehicles fitted with tracking devices,
but it did not ensure that this requirement was met by the private sector vehicles that it
requisitioned to transporting the transit cargo.
Transport by road has thus turned out to be a major vulnerability of the transit system. Transport
of transit cargo by Railways had also suffered serious set back due to delays and en-route theft,
but it was perhaps not as bad as it has turned out in the case of NLC. Besides making the
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transport system competitive and open to both public and private carriers, the following
precautionary measures are necessary to control the transit-related abuse.
(i) Ensuring that transit cargo is carried only by bonded carriers;
(ii) Introducing live monitoring of vehicles carrying transit cargo through state-ofthe-
art tracking systems based on GPS and GPRS technologies;
(iii) Sealing the cargo containers with RFID seals;
(iv) Scanning the cargo containers both at the ports of entry at Karachi and the
Customs Stations of exit at Torkham, Chaman, etc;
(v) Keeping proper records of weight of containers / vehicles at both ends of the
transit continuum;
(vi) En-route reporting by the transporters at Customs check posts established since
2009 on the prescribed transit routes;
(vii) Effective anti-smuggling cover to traffic-in-transit; and
(viii) Suitable financial guarantees covering duties and taxes in case of any en-route
pilferage.
Question 02: As to whether the Customs authorities are prohibited to check the transit
goods en-route from Pakistani ports to the destinations outside the country?
Answer: The jurisdiction of Customs to check the transit cargo is limited by the provisions
of Chapter XIII of the Customs Act, 1969, read with the provisions of the ATTA, 1965. Also, as
held by the Hon¡¦ble Supreme Court of Pakistan in the case of Federation of Pakistan vs
Jamaluddin and others (PTCL 1996 CL 535). While there is no explicit provision in Chapter XIII
of Customs Act to enable Customs to examine the Afghan transit cargo in Pakistan, ATTA does
provide for ¡¥Inspection¡¦ of import cargo for Afghanistan and for both ¡¥Inspection¡¦ and
¡¥Examination¡¦ for export transit originating from Afghanistan. The reason for this difference was
evidently to create deterrence against smuggling of narcotics that could possibly be concealed in
export cargo of Afghanistan in transit through Pakistan. In practice, Pakistan Customs has been
conducting selective examination of transit cargo to deter misuse by mis-declaration of quantity,
quality and description of goods. Collector Customs Public Notice No.16/2000-(A) dated
30.09.2000 [para 4(a)] contains the enabling provision for examination. It should therefore be
possible to do the same en-route where the Customs authorities have received reliable
information of potential wrongdoing.
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As regards transit cargo for ISAF/NATO/US forces operating in Afghanistan, the ATTA is not
relevant as this transit facility has been provided under a Government of Pakistan MOU dated
19.06.2002 with ISAF. While the MOU does not contain any provision to compromise
examination or correct description, ¡¥Inspection¡¦ or ¡¥Examination¡¦ of ISAF / NATO / US cargo is
not specifically provided in the procedure. This loophole in the Customs procedures for ISAF
cargo has created potential opportunities for the wrongdoers. In fact available evidence is a clear
pointer that indeed the transit goods were not found the same as were declared. That is when in
early 2009 FBR did direct the Customs to conduct ¡¥Examination¡¦ of ISAF cargo on the basis of
selectivity criteria, after it came to light that ISAF transit was not completely abuse-proof.
As the Hon¡¦ble Supreme Court of Pakistan has also deprecated Customs intervention in misdeclaration
cases on the ground that it was a bonafide transit import for Afghanistan, the FBR
needs to move appropriate amendments in the Customs Act, making mis-declaration detected enroute
tantamount to abetting smuggling. The new APTTA, 2010, ratified recently provides for
filing GD and allows examination to the extent of 5% of containers. There is no logic why ISAF
/ NATO cargo should not be dealt with in the same manner.
Question 03: If there is prohibition, then what is the guarantee that 100% transit goods
are the same, for which permission is available through the Afghan Transit Trades
Agreement and no pilferage had taken place during its transportation from Pakistan to
Afghanistan?
Answer: The recent detections at Chaman and Torkham are a clear indicator of a very
serious phenomenon of mis-declarations, shortages and en-route replacements and diversions of
transit containers. Therefore, a package of effective countermeasures needs to be put in place to
contain the menace of pilferage during transportation of goods from Pakistan to Afghanistan.
Question 04: As to whether within the country at different places there are check-posts of
the Customs department to ensure that the goods are transported outside the country
without any pilferage, leakage etc. if it is so then why complaints of smuggling of these
goods are being received continuously?
Answer: The Customs Department had check posts and mobile anti-smuggling squads
operating on the highways but in 2004 the Government decided to wind up their operations,
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mainly due to mounting public complaints against the Customs staff manning them. In February,
2009, however, the FBR decided to establish four check posts at Baburloi (between Khairpur and
Sukkur) and Khairabad (between Attock and Peshawar) for transit via Torkham, and Khur Khera
(between Hub and Uthal) or Baburloi (between Khairpur and Sukkur) and Baleli (between
Quetta and Qila Abdullah) for transit via Chaman. The purpose was to monitor transit cargo for
any leakages at these key locations. However, these check posts were not provided with
necessary resources, including strong technology support. Nor was it ensured that vehicles
transporting transit cargo would essentially be reporting to these check posts for monitoring of
their seals, etc. Besides, these check posts were meant only for commercial transit, not for ISAF
cargo. In practice, these posts were there largely to collect ¡¥fees¡¦ from the drivers. In view of
their almost non-functional status, their contribution in controlling smuggling is at best only
marginal.
Question 05: As to whether allegation contained in renowned newspaper as well as
television channel Duniya Today dated 28.06.2010 wherein anchor person Dr. Moeed,
alleged that 10,000 to 11,000 containers brought into Pakistan had not reached the
destination under the Afghan Transit Trade Agreement or any instrument and the goods
had been smuggled within Pakistan without making payment of the duty? If so, how much
loss has been caused to the public exchequer?
Answer: The media reports that 10,000 to 11,000 transit containers had not been transited
to Afghanistan were based on evidence with the FBR that 11,727 transit containers were missing
as per PRAL¡¦s data for the period January 2008 to April 2010. In fact, then DG (Intelligence &
Investigation), Mr. Lutfullah Virk, while investigating a massive fraud involving 52 containers
imported in the name of ISAF by two Afghan companies: Lunar Products of Kabul (49) and
KOPCKE Global of Kabul (3), had asked the Collectors to investigate the matter to ascertain
facts about the containers missing from PRAL¡¦s database. However, he never claimed that
11,000 containers were actually missing. The PRAL¡¦s response was that while relevant data on
11,000 containers could not be entered into the PRAL database due to power outages and
infrastructural problems, the Cross Border Certificates in most cases were available on record.
However, according to our investigation the PRAL data is so highly unreliable that it is not
possible to arrive at any reasonable conclusions on the basis of this data.
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While it is not possible to work out a precise figure, even after a more detailed inquiry, the
investigation conducted by the Office of Federal Tax Ombudsman establishes that at least 7,922
transit containers were pilfered within Pakistan over the past almost four years. This conservative
estimate is based on containers that did the impossible task of ¡¥completing the Karachi-
Afghanistan-Karachi round trip¡¦ in less than eight days. This may however be only a tip of the
iceberg. If we extrapolate the size of the problem on the basis of - seemingly more probable ¡V
10-day round trip, the number of containers pilfered en-route would work out to 15,314.
It is again not possible to compute the exact loss caused to the public exchequer. Given the fact
that smuggling is lucrative for high tariff items and also that the items contained in containers
involved in various scams are high tariff items, we have conservatively kept the loss to the
exchequer on account of evaded duties and taxes on an average container at Rs.1.5 million per
20-feet container. This way the loss to the exchequer on account of 7,922 containers would be at
least Rs. 19 billion, and for 15,314 containers Rs.37 billion. Given the fact that according to a
study provided by the FBR, the estimated value of ATT-related goods smuggled into Pakistan
(both goods pilfered inside Pakistan and goods returning from Afghanistan) is about US$2
billion per annum, the estimates of loss to the exchequer do not appear to be off the mark.
Question 06: As to whether it is possible to fix responsibility upon the officers/officials of
FBR/Customs Departments for causing huge loss to the public exchequer if question No.5 is
established and then what action can be initiated against them, if above questions are
replied in positive in the formulations?
Answer: It is possible to fix responsibility on officers / officials of Customs Department for
their negligence, inefficiency and collusion, as the case may be. It will however require more
detailed investigation, including forensic audit of FBR systems. Although some disciplinary
action against the staff responsible for various scams has recently been initiated, the size of fraud
is seemingly so huge that this will require a dedicated team of high integrity individuals to do the
job. The Office of the Federal Tax Ombudsman intends to complete the job through an
Inspection Team to be set up under Section 17 of the Establishment of the Office of Federal Tax
Ombudsman Ordinance, 2000. The Inspection Team will determine both disciplinary and
criminal liability of all those involved in cases of serious maladministration / corruption.
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Question 07: As to whether workable/concrete mechanism can be adopted to avoid evasion
of duties in the name of transit goods for Afghanistan under Agreement, which actually is
being smuggled into country including all kinds of contraband items otherwise prohibited
to import into Pakistan save in accordance with the relevant laws?
Answer: Workable and concrete mechanisms to avoid evasion of duties through misuse of
Afghan transit are possible with the use of reengineered business processes and use of modern
technologies. The key lies in introducing automated operating systems and procedures duly
supplemented by the requisite technology input in terms of monitoring, tracking and scanning
capabilities. Tariff rationalization can also help reduce incentive for smuggling. As no amount of
technology input or structural and procedural reform can be a substitute for the failings of the
human capital of an organization, it is critical to put in place both short term and long term
measures for capacity building of staff through improved training and appropriate financial
incentives for good work. A transparent and credible system of infallible accountability of
corrupt and collusive staff will certainly make a difference in controlling transit-related scams in
Pakistan.
Question 08: Is it correct that under garb of Afghan Transit Trade the items not in use in
Afghanistan are allowed to be imported for Afghanistan?
Answer: It is correct that under the garb of ATT huge quantities of items the consumption
of which is negligible and limited in Afghanistan are imported in Afghanistan. Cigarettes,
fabrics, black tea, diapers, electronic items, tyres, tubes, crockery, ball bearings, telephone sets
and LCD TVs are among the items which are imported through transit far in excess of Afghan
requirements. (Cigarettes and auto parts are presently on the negative list of Afghan transit
through Pakistan. However, these items are imported into Afghanistan either through misdeclaration
or through Iran and other neighbouring counties and smuggled into Pakistan.) A
change in the incidence of duties and taxes in Pakistan immediately indicates shift of such items
in the transit regime of Afghanistan. Higher taxes and tariffs in Pakistan prompt excessive
imports of such items in transit to Afghanistan for subsequent smuggling into Pakistani markets.
There is ample evidence that truckloads of smuggled goods keep entering Pakistan both through
regular and irregular border crossings. The fact that per capita import of Afghanistan is 72%
higher than the per capita import of Pakistan despite the fact that the former¡¦s per capita income
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level is almost one-third of the latter¡¦s clearly substantiates that Afghanistan imports goods far in
excess of its genuine requirements.
Question 09: Is it correct that prior practice was that goods meant for transit would go
under seal affixed at Karachi ¡V opened at Torkham, checked and thereafter resealed and
allowed to cross border?
Answer: The practice is still in vogue. ATT cargo delivered at Peshawar and Chaman by
Pakistan Railways, or by NLC or NLC-authorized trucks at Amangarh or Chaman is imported
under seal of the Shipper/Exporter, and the consignment is cleared for transit after affixing a
second seal by the Customs. At the Customs border station, the goods are de-sealed and shifted
to either Afghan trucks or Pakistani trucks arranged by the Afghan importers, again under seal of
Customs. At Torkham, the Customs seals are removed after inspection and the container gate
passed allowing it to cross over to Afghanistan. The commercial ATT cargo at Chaman also
undergoes a similar procedure.
The US Army / ISAF/ NATO / transit stream of cargo is also imported from abroad under
Shipper¡¦s/Exporter¡¦s seals. After satisfactory inspection, Customs at Karachi affix an additional
seal on the container. However, the container travels direct to Chaman or Torkham and after
satisfactory inspection allowed to cross border in the same vehicles. Customs seals are removed
by the border Customs as an evidence of arrival of goods.
Question 10: Is there any clause in MOU that ¡¥Negative list¡¦ goods shall not be carried by
road/or should be declared and escorted from point of entry to exit?
Answer: There is no Negative List of goods in transit to Afghanistan for ISAF / NATO /
US cargo under the MOU. However, there are two items namely cigarettes and auto parts which
are currently on the Negative List under ATTA. The new APTTA, 2010, does not provide the
flexibility to place any item on the Negative List unless the item is also prohibited for import into
Pakistan.
Question 11: Does Government of Pakistan charge any amount other than Customs duty
for use of Pak Port, land route etc?
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Answer: No duty and taxes or levies are charged by the Government of Pakistan on transit
trade goods. Any such charge would be a violation of the UN Convention as well as the bilateral
transit trade agreement. However, transportation charges and any en-route tolls are the
responsibility of the importer.
Question 12: As to whether no precautionary measures based on scientific methods are
available with the Customs department to detect/ensure that the goods being transported
under the Afghan Trade Transit Agreement are not brought back to Pakistan for the
purpose of smuggling or the containers are allowed to be de-sealed before reaching their
destination, and if so happened who shall be held responsible and subjected to legal
actions?
Answer: The Government restricted transport of Afghan transit cargo to Railways and
ISAF/NATO Cargo to NLC as a precautionary measure against misuse. Whereas Railways role
in transport has dwindled to a negligible level, the role of private sector has increased to a level
that it covers most transit cargo, thanks to the mismanagement of transport coordination role
assigned to NLC by the ECC in the year 2002. NLC started ISAF transit in May, 2002 but did
not ensure scanning and tracking mechanisms on transport being authorized by it to private
transporters to transport transit cargo. Indeed the existing precautionary measures are too porous
to be effective against organized fraud and manipulation. There are two components to the
problem of smuggling of ATT goods into Pakistan. One is when the goods return to Pakistan
after crossing into Afghanistan. The border security forces have failed to control this type of
smuggling. As regards Customs, it has no presence, even capability to be effective at the borders.
The second component is that transit goods do not cross into Afghanistan at all and are en-route
pilfered within Pakistan. This problem can be controlled effectively through the use of RFID
seals, and en-route monitoring through GPS and GPRS systems. Using latest IT technologies,
both categories of goods can be identified should the exporters of goods be put under statutory
obligation to ensure that all transit goods have embedded bar codes. For a small additional cost,
it would be within reach of the law enforcement agencies to detect presence of transit goods in
Pakistan.
Question 13: As to whether the allegations contained in FIR No.179/2009 dated 19.05.2009
that the goods meant for Afghanistan under Afghan Trade Agreement were in fact being
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smuggled into Pakistan on account of wrong disclosure/declaration and due to this reason
how much loss has been caused to public exchequer?
Answer: It is true that large quantities of goods meant for Afghanistan under ATTA are
smuggled into Pakistan under wrong declarations. As per IGMs the goods that became case
property in FIR No. 179/2009 were declared as ¡§Assorted Beverages¡¨. Their general description
as given in the GDs was ¡§Food Stuff Assorted Beverages¡¨ and ¡§Soft Drinks and Fresh Juices¡¨.
In actual fact, there were 6623 bottles of liquor and 7421 tins of beer in two containers that were
intercepted by Islamabad Police. This clearly reflects that the importer had misused the ATT
facility. The loss to the exchequer as determined by the Customs in this case is Rs. 16.9 million,
excluding fine and penalties. (Written statement of ex-SP Sadar, Islamabad, is at Annex-V.)
Question 14: As to whether no mechanism is available to prevent pilferage, leakage,
evasion of the tax on the goods imported into Pakistan by land, sea or air routes on
domestic consumable goods under the Customs Act and other available laws? If it is so
then who is responsible for massive smuggling and evasion of duty, causing huge loss to
public exchequer?
Answer: Smuggling and tax evasion can be effectively controlled by carefully selected and
motivated anti-smuggling/anti-evasion staff supported by well-considered legal and procedural
framework that is complemented by adequate technology input in an environment of efficient
supervision and firm accountability for wrongdoing. The law enforcement agencies to whom
anti-smuggling powers have been assigned are responsible for containing smuggling in their
respective jurisdictions. Customs is responsible for controlling evasion of duties and taxes on the
import of cargo being cleared through regular Customs stations. FBR and Customs are also
responsible for their failure to address the issues of porous procedures, naive precautionary
measures and weak supervision by the senior Customs management. Indeed, collusion of corrupt
Customs officials with organised smugglers and tax evaders causes huge loss to the national
exchequer.
Diversion of transit cargo en-route from Karachi to Torkham / Chaman does not constitute
smuggling as defined under Section 2(s) of the Customs Act, 1969. This only attracts penal
provisions under Section 156(1) 64 of the Customs Act, 1969 for evasion of duties and taxes by
mis-declaration of goods or providing fake import authorizations. The definition of smuggling
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clearly needs to be suitably amended to include in its purview all en-route diversions of transit
goods. The Customs Act and Customs Rules provide extensive powers to customs officials to
protect the economic borders of Pakistan. However, investigations held during the course of this
study indicate that smuggling and evasion of taxes is rampant, both through blue and white collar
channels. It is apparent that the problem is not so much with the law as with its enforcement. In
order to rectify the situation we will have to place greater reliance on automation and technology
rather than manual processes. Introduction of appropriate technology is critical to minimising
direct contact between importer and tax collector, and to reduce leakages in the system.
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