Point of View

Addressing challenges related to Customs controls in free zones

16 October 2018
By Mariya Polner, Senior Policy Advisor, and Satoko Kagawa, Technical Officer, Compliance and Facilitation Directorate, WCO

Trade has always been one of the manifestations of freedom and power. The idea of a “free port” can be traced back to 167 BC, when the Roman Senate made a decision to turn the then Roman island Delos into a free port[1]. City-States in the early Middle Ages, such as Venice, operated in a way that could nowadays be defined as free ports or free zones. The cities of Hamburg and Bremen, being key players in the Hanseatic League in the North and Baltic seas in the 13th century were another manifestation of this phenomenon. However, it is commonly agreed that the oldest free zone in its modern sense dates back to Shannon in Ireland, where the first Free Trade Zone, the most commonly referred to type of free zone, was established in 1959.

What characterizes all these free zones is the incentives they provide to economic operators. Free zones serve as “growth poles” for national and regional economies by encouraging foreign direct investment (FDI), in particular by offering less regulation and governmental “red tape.” Today, over 3,000 active free zones exist (in one form or another) in 135 countries[2]. They have become a global phenomenon and an integral part of the global supply and value chains within a timespan of just over 50 years.

Throughout these years, the concept itself has evolved substantially as well. The Organisation for Economic Co-operation and Development (OECD)[3] identifies the following four categories of free zones: free trade zones, focused at pure re-export of traded goods; export processing zones, designed to export goods with a significant value add; special economic zones, which include multi-sectoral approaches to economic activities and focus on both domestic and foreign markets; and industrial zones, which host specific economic activities (e.g., telecommunications or textiles). The International Labour Organization (ILO)[4] offers a more detailed classification that, apart from the aforementioned types, includes free ports, enterprise zones, financial services zones and science zones.


The same characteristics that make free zones attractive to legitimate business also lure fraudsters and criminals. They can forge documents and use free zones to repackage or relabel goods, or manufacture and assemble new goods in these zones. The transit and transshipment of goods pose the highest risk because it is easier for criminals to disguise the origin and final destination of goods. This masking can be done by switching bills of lading once goods arrive in the free zone, switching containers and their contents, or simply by shipping goods to a different destination than the stated one. Such practices pose risks in terms of revenue collection and public health, as well as security.

So far, evidence has been anecdotal, and no systematic research was conducted up until this year, when the OECD and the European Union Intellectual Property Office (EUIPO) published a study entitled Trade in Counterfeit Goods and Free Trade Zones: Evidence from Recent Trends[5], which examines the use of free trade zones in the counterfeit goods trade. In 2018, another organization, the Economist Intelligence Unit, issued The Global Illicit Trade Environment Index[6], which also focuses on free zone governance. Supported by research and case studies related to five major free zones, the Index, along with the OECD/EUIPO study, fuelled a much needed debate and brought the issue to the attention of policymakers across the globe.

Nowadays, the reputation of industries and countries depends on the way their free zones are managed. And not only the reputation, but the security of the whole supply chain is at stake. In times of increasing transparency and civil responsibility, there is a critical need to ensure that the operational environment of free zones is safe and secure, procedures are efficient and transparent, operators are law abiding, and commodities going through the free zones are legal.

Within the current framework, the adoption and implementation of the Specific Annex D, Chapter 2 of the International Convention on the Simplification and Harmonization of Customs Procedures (as amended), more commonly referred to as the Revised Kyoto Convention[7] (RKC), is the first step to ensure adequate levels of Customs procedures and controls in free zones.

Revised Kyoto Convention

Overall, the RKC, which is a blueprint for modern Customs procedures, is aimed at developing predictable and transparent Customs procedures based on the use of information technologies, risk management, a coordinated approach to controls along with other governmental agencies, and partnerships with trade, among other things. The RKC consists of three parts: the text, a General Annex with ten Chapters, and ten Specific Annexes. The entire General Annex is binding on Contracting Parties and no reservations are possible with respect to its implementation. Specific Annexes of the RKC consist of Standards and Recommended Practices regarding other aspects of Customs procedures. Contracting Parties may accept one or more of the Specific Annexes as well as submit reservations to Recommended Practices to the WCO.

Chapter 2 of Specific Annex D to the RKC lists 21 standards covering a wide range of Customs procedures related to free zone operations. In this Chapter, free zones are defined as ”a part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory.” For Customs purposes, the free zone denomination pertains exclusively to the status of goods, i.e. the tax or duty exemption. A wider implication of this definition is that all non-tariff Customs activities, such as border control functions, including inspections and seizures, should be preserved and enforced. However, different interpretations of this definition exist as some countries interpret it as “being outside the Customs territory” altogether.

Depending on the institutional setup of the free zone, the scope and degree of Customs control over goods introduced and the economic operations carried out in the zones, vary considerably from one country to another. From this perspective, Standard 4 of Specific Annex D is important because it stipulates that Customs “shall have the right to carry out checks at any time on the goods stored in a free zone.” Its Recommended Practice stipulates Customs controls on free zone goods and operations on the grounds of public morality, public security, public hygiene or health, and veterinary or phytosanitary considerations. If these controls are exercised by another agency on behalf of Customs, they should not be neglected.

Standard 4 is to be interpreted together with Standard 3, which states that “the Customs shall lay down the arrangements for Customs control, including appropriate requirements as regards the suitability, construction and layout of free zones.” The engagement of Customs authorities from the early stages in developing the free zone concept is necessary to ensure safety and security within the zone.

Customs controls in free zones are more flexible than those exercised under, for example, Customs warehousing procedures, and are principally concerned with the relevant documentation in order to check that persons introducing goods into the zone keep proper accounts of the goods (by using either special registers, relevant declarations or electronic systems), so that the circulation of goods in and outside the free zone can be controlled. Nevertheless, Customs has the right to carry out spot checks on goods at any time to ensure that they are being accounted for satisfactorily, are being subjected to authorized operations only, and that no unauthorized goods have been introduced or removed. For efficiency, Customs controls should be based on a risk management system as provided for in the RKC.

Specific Annex D has to be considered together with other provisions of the RKC related to the origin of goods and Customs regimes, such as transit and transshipment, which are frequently used by smugglers and criminal organizations to their advantage. Origin (the RKC’s Specific Annex K) is used not only to calculate duty rates and quotas, but also as a risk indicator for Customs authorities. Thus, origin shift, particularly due to the proliferation of bilateral and regional trade agreements and their relation to free zone regimes, becomes another challenge for Customs. In-transit and transshipment regimes (addressed in the RKC’s Specific Annex E) pose a high risk, particularly because these procedures can be used to disguise the country of origin or to enter goods into Customs territories where border enforcement for transshipped or transit goods might be weak.

As of today, there are 115 Contracting Parties to the RKC, but very few of them have expressed adherence to Specific Annex D. There are also a small number of countries that have not ratified the Convention, but are compliant with its Standards and Recommended Practices, including, sometimes, those listed in the Specific Annex. There are also countries that deny Customs jurisdiction over goods in free zones, leading to the erosion of Customs procedures and control functions, and opening ways for illegal trade.

Moving forward

As more and more Customs administrations are ready for a constructive dialogue on this difficult topic, it became evident that there was a need to conduct intensive discussion to find the solutions based on WCO Members’ practices, and to perhaps review existing WCO instruments or develop new ones. Feedback and best practices from Members will be gathered during discussions in the relevant WCO bodies and workshops, and through an online survey. Additional research will also be undertaken, including fieldwork in the free zones in different regions.

This review process will offer a real opportunity for Customs administrations and other stakeholders to explore modern and efficient Customs procedures and control mechanisms through the deployment of information technology (IT) solutions and inspection technologies to fill existing gaps in free zone control operations. Active participation of Customs administrations and other stakeholders in this process will enable the development of a cooperative and sustainable policy framework that will be supported and implemented by everyone involved in the design, governance and operation of free zones.


More information



[1] Zarmakoupi, Mantha (2013), “The City of Late Hellenistic Delos and the Integration of Economic Activities in the Domestic Sphere”, CHS Research Bulletin 1, no. 2.

[2] Akinci, Gokhan and James Crittle (2008), “Special economic zones: performance, lessons learned, and implication for zone development”, Foreign Investment Advisory Service (FIAS) occasional paper, Washington, DC: World Bank.

[3] OECD (2009), “Free Zones: Benefits and Costs”, OECD Observer No. 275, November 2009.

[4] International Labour Organization (2003), “Employment and social policy in respect of export processing zones (EPZs)”, GB 286/ESP/3, March 2003, Geneva.

[5] OECD/EUIPO (2018), Trade in Counterfeit Goods and Free Trade Zones: Evidence from Recent Trends, OECD Publishing, Paris/EUIPO, accessed on 17 September, available at http://www.oecd.org/governance/trade-in-counterfeit-goods-and-free-trade-zones-9789264289550-en.htm

[6] The Economist Intelligence Unit (2018), The Global Illicit Trade Environment Index, accessed on 17 September, available at <https://www.eiuperspectives.economist.com/sites/default/files/Illicit%20Trade%20WHITEPAPER%20(19%20June%202018).pdf>

[7] WCO (2006), International Convention on the Simplification and Harmonization of Customs Procedures (as amended), accessed on 18 September, available at http://www3.wcoomd.org/Kyoto_New/Content/content.html