Dossier

Leveraging data analysis to identify irregularities at the border between Peru and Ecuador

By Mary Isabel Delgado Cáceres and Edwin Medina Ramirez, Customs Specialists, Peru Customs

Our names are Mary and Edwin, and we are Customs officers working in the city of Tumbes, located on the northern Peruvian coast, only 30 km from the Ecuadorian border. Despite the fact that we work in different sections of the Administration, we both have an interest in, and passion for, international commerce, particularly with regard to regional integration initiatives. In fact, we both believe that the development and performance of a Customs administration’s capacity are fully contingent on its ability to establish high levels of cooperation and coordination with neighbouring Customs administrations.

Peru is part of the Andean Community, a trade bloc of four countries – Bolivia, Colombia, Ecuador and Peru – in which goods of Andean origin may circulate free of duty. However, value-added tax (VAT), amounting to 18% of the Customs value, is applied to goods. Consequently, although there are no Customs duty controls for community goods, VAT controls are imposed. In effect, the borders between the Member States are actually VAT borders, as duties are only collected at the Community’s external borders. Moreover, consumer goods “imported” by Ecuador from Peru and Colombia were subject to some tariffs or “balance of payments safeguards” from January 2009 to 2017 as a way of compensating for the depreciation of the currencies of Colombia and Peru (Ecuador adopted the US dollar in 2000 and has no control over the currency’s exchange rate).

As part of the Andean Community’s effort towards further regional integration, Binational Centres of Compliance and Facilitation were set up in Tumbes, Peru, and in Huaquillas, Ecuador, with the objective of ensuring enhanced coordination in the migration, sanitary and Customs control activities undertaken by each country (see video ). However, since our appointment at the Tumbes Customs office, we have witnessed the unique difficulties and challenges faced by both Customs administrations in improving border-crossing processes through enhanced coordination, and, more especially, in effectively fighting fraud.

Beginning the research

Besides processing small traders’ transactions, the main task of officials stationed at the Binational Centres at Tumbes and Huaquillas is to clear trucks transporting agricultural and aquatic products. One dominant feature of the border is the significant quantity of fraudulent commercial transactions as well as noticeable smuggling activities. Products that are smuggled from Ecuador to Peru include petrol for vehicles and domestic use. Fruit, vegetables, tyres and spare parts for cars are in turn smuggled from Peru to Ecuador. There are no records or official statistics of such product flows between the two countries, although these types of goods cross the border regularly.

Fraud is facilitated by the fact that controls are carried out by each Customs administration independently of the other and at different times, and that there is no exchange of information between both services. Moreover, traders can still use other border-crossing points located between Huaquillas and Aguas Verdes, whose existence pre-dates the setting up of the Binational Centres. Although only pedestrian traffic is supposed to use these historical border posts nowadays, heavy load vehicles still transit via them.

So far, there have been very few investigations on informal or fraudulent trade in this border area. We therefore decided to conduct some research, hoping to shed light on irregular practices between the two countries. Having considered different methodologies, we agreed to use mirror analysis as a means of identifying trade discrepancies, major gaps and where data “does not fit,” in order to unearth undetected fraud and prioritize in-depth risk analysis. Additionally, the mirror analysis technique would allow us to continue performing our daily tasks, something that would be impossible in a field investigation.

Methodology and difficulties

We chose to analyse trade statistics of at least three years, i.e., 2014 to 2016, in order to establish patterns and tendencies. We had initially planned to use domestic trade information sourced from the Customs offices at Tumbes and Huaquillas, but this proved impossible as none of these offices were able to provide “clean” data that was suitable for analysis purposes. In addition, trying to extract adequate data from the information technology (IT) platform used for Customs clearances at the Tumbes Customs office proved impossible too, as the platform differs from that used in Peru’s main Customs offices where a more developed platform was implemented many years ago.

With these hurdles in mind, we then decided to widen the scope of our analysis and instead look at all import and export data, using data provided by countries to the United Nations Commodity Trade Statistics Database (COMTRADE database). Export and import data is presented in terms of value (thousands of US dollars on a “free on board,” or FOB, basis), weight (in kilograms) and supplementary quantities. Only the gaps in value were calculated as it allowed us to analyse the volume of trade regardless of the unit of measure of different products, and to make general conclusions directly from the entire group of products under review.

The differences found in value do not always represent a revenue gap, and the information should undergo an initial analysis before the data is compiled. Among the difficulties we encountered during the mirror analysis process, the most important was arranging the statistics from Peru and Ecuador in a coherent way, in order to allow a comparison without the help of any IT software. Another issue was the fact that the Peruvian and Ecuadorian administrations were classifying identical or similar products in different Harmonized System (HS) subheadings.

Research outcomes

Once we had cleaned the data, by comparing the value of importations of a given six-digit HS subheading made by one country against the value of exportations of the same subheading in the other country, we were able to detect gaps in the trade, which indicated potential fraudulent flows across the analysed subheadings.

Some of the gaps in commodities have decreased over the years due to the diminution and later elimination by Ecuador of the “balance of payments safeguards.” However, the most glaring value gaps that we identified were those relating to the trade in aquatic products. In both countries, imports of aquatic products in one country exceeded the volume declared at export in the other (see chart).

As one can see in the chart, the fraudulent flow is following an upward trajectory. As there are no Customs duties applied to goods of Andean origin moving among the Community’s Member States, the cause of this pattern remains unknown. One hypothesis is that companies may be trying to hide the scope of their activity to avoid income taxes.

Another commodity for which we identified a gap is that of shark fins. From 2014 to 2016, Peru imported shark fins at a value of 4,525 billion US dollars, while there were no corresponding exports registered by Ecuador during the same period. Shark fishing is prohibited in Ecuador, however if a shark is caught while fishing for other aquatic species, it (or its body parts) may be exported for commercial purposes, but the volume of this “accidental fishing” is very low and could not account for the huge volume of outflows towards Peru. Shark fishing is also prohibited in Peru, but when they are caught in another country, their importation, or that of their body parts, is allowed.

It is obvious that existing trade regulations create conditions conducive to the fraudulent trade in shark fins. In addition, it is worth mentioning that trade in sharks is also regulated by the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) to which Peru and Ecuador are Contracting Parties.

Potential of the research

By using mirror analysis techniques, we were able to identify possible irregularities as well as to make recommendations on how to tackle some of the potential frauds. More importantly perhaps, our research has highlighted the difficulties that Customs officials face when they try to leverage data and conduct data analysis. Trade information extracted from the Customs clearance systems is not suitable, and both Peruvian and Ecuadorian Customs offices at the Binational Centres have very few skilled personnel to “work” data.

At the Tumbes Customs office more specifically, the Customs clearance system needs to be upgraded to allow for the publication of adequate and timely reports on trade. It would be beneficial if data analysts were recruited to work at the Centres and equipped with the right tools to perform data analysis. Last but not least, we are of the firm belief that information should be shared between countries in a timely and accurate manner.

 

More information
Mary.delgado@ucsp.edu.pe
e-medinaramirez@hotmail.com