SEPTEMBER 04, 2019

By V Sivasubramanian & B Sathyan

IN the Global Trade 2018 Conference in London, the Secretary General of the World Customs Organisation (WCO) Mr Kunio Mikuriya mentioned about¹ the possible benefits to Blockchain technology, such as to assemble the required pieces of information for Customs declarations, inter-agency exchange of information, implementation of free trade agreements, implementation of Authorized Economic Operators (AEOs) – Mutual Recognition Agreements (AEO-MRA), revenue collection and compliance management.

Some blockchains have already been built and are under advance phase of testing for use in supply chains and by Customs Administrations. For example, Customs authorities in Australia, the Netherlands, Peru, Saudi Arabia and Singapore (amongst over 90 organizations) are seeking to participate on TradeLens, a collaboration between Maersk and IBM underpinned by blockchain technology². Last month, even Thai Customs decided to join TradeLens to streamline their procedures. Similarly Customs administrations in Costa Rica, Mexico and Peru are seeking efficient implementation of their MRAs by sharing information on AEOs on Cadena. Right now only a handful of players are involved in the development of blockchain technology globally.

The question is whether and if yes, when the Indian Customs will also join any of these or some other initiative to use blockchain. It is not as if Indian Customs does not already know the advantages of faster availability and sharing of information in improving the release times (which in turn will enable India to improve its position further in the 'Ease of Doing Business' Index).

Time Release Study 2019 by JNCH

As per the Time Release Study (TRS) 2019³ released by the Jawahar Customs (JNCH), pre-arrival processing of the advance bills of entry could improve the release time (i.e. the time taken between entry inwards to out of customs charge) of imported cargo by 45% from 150.03 hours to 83.06 hours in 2019. Customs was able to complete assessment in 60% cases of advance bills of entry filed during the corresponding period even before the entry inwards.

But the fact is also that every third bill of entry is not filed in advance. This is despite the demonstrated benefits in terms of higher facilitation and lower release time, besides persistent 'nudge' by the JNCH administration. The typical reasons cited for non-filing of advance bills are the non-receipt of shipping documents and the indifference on the part of customs brokers. The TRS 2019 study also suggests certain statutory measures (e.g. graded interest payments for delays, reward points to importers/customs brokers) to further induce and incentives the trade to file advance bills.

However, in our view, a more system based approach involving a big push to use of block chain would give better results. This is because the block chain will obviate paper-based procedures (and the delays arising there from) and enable the Customs Authorities to automatically receive shipping data as soon as the consignments leave the port of origin, giving them enough time to prepare for receiving the shipments and for pre-verifications.

Block chain technology

Block chain is a cloud based distributed ledger. Distributed ledgers use independent computers – referred to as nodes – to record, share and synchronize transactions, instead of keeping data centralized as is the case with a traditional ledger.

Let us illustrate this. Every commercial transaction between business entities involves two or more legal persons. For example, an international sale transaction would involve a seller (S) in country C1 and a purchaser (P) in country C2. But the sale transaction in the books of S will correspondingly reflect as a purchase transaction in P's books.

In a conventional scenario, if the sale is on credit, S will record this transaction in his sales ledger while debiting P's account (as the debtor). P will record the transaction in his purchase ledger while crediting S (the creditor). Assuming the payments between S and P are settled on a monthly basis through online bank transfer, P would debit S on transfer of payment to S at the end of the month. S will credit P once the amount is received. At the end of a business cycle, S and P would reconcile their books by exchanging details of the transactions as entered in their respective ledgers.

If these ledgers were to be maintained on a block chain, all the entries can be automated through a rule engine without any human intervention. But the debit to P's accounts in S's books cannot be authenticated without a corresponding debit to S's accounts in P's books. So there will be no separate requirement for reconciliation between S and P.

Please note that each of them will continue to maintain their individual ledgers, but the impact of entry in one will automatically get reflected in the counterpart ledger based on pre-programmed instructions. If anyone tries to modify the ledger entries, the system will not permit such modification without proper approval by all the parties involved.

Thus the block chain creates a system based trust even amongst unknown parties by ensuring data integrity and a full audit trail, and enables them to transact business and exchange information without an intermediary.

However, the illustration may seem to be over simplistic. The real life situation will indeed be much more complex and may involve several other agencies in the supply chain such as the carriers / shipping lines, banks, customs authorities, customs brokers, Freight forwarders, testing laboratories, etc. But the principle remains the same that each transaction involving two or more parties needs to be authenticated by each party with respect to their part of the transaction for the entire chain to stand authenticated.

Trade Lens allows the parties to a supply chain - including beneficial cargo owners, freight forwarders, inland transportation providers, ports and terminals, ocean carriers, customs and other government authorities to network, share and manage the documents involved with a consignment - packing list, bill of lading, certificate of origin, dangerous goods declaration, customs clearance, commercial invoice, export/import documentation, etc. on a single, secure, open and interoperable data-sharing and collaboration platform. The ecosystem participants access the platform through open Application Program Interfaces (APIs).

Challenges in implementation

There can be no gainsaying the benefit of block chain technology for an international transaction where parties may hardly know each other. This, even while avoiding intermediaries and the costs associated with them. But the advantages to trade facilitation across countries even while ensuring full compliance with the legal requirements, can be even better!

Of course creation and maintaining a block chain is not without its own challenges. First is institutional namely, someone trustworthy will need to create and maintain the block chain. Second is technological, such as standardization of data, interfacing between different information technology (IT) systems, interoperability, harmonization and the quality of data. Third is financial namely, funding of the block chain creation and a robust operational model for its sustenance. Fourth is contractual or regulatory addressing issues of ownership, jurisdiction, where the data is to be stored, dispute resolution, etc.

It is imperative that an initiative, if any, by Indian Customs towards use of block chain should also take note of these challenges and suitably address them.

(…to be continued)

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¹) Ref WCO's media summary of the conference available at http://www.wcoomd.org/en/media/newsroom/2018/november/digital-technology-and-customs-discussed-at-the-global-trade-2018-conference-in-london.aspx

²) Ref "Trade Lens uses block chain to help Customs authorities facilitate trade and increase compliance" by Stewart Jeacocke and Norbert Kouwenhoven available at https://mag.wcoomd.org/magazine/wco-news-87/tradelens/

³) Time Release Study 2019, Jawaharlal Nehru Custom House, available at http://www.jawaharcustoms.gov.in/pdf/TRS%202019.pdf .

[V. Sivasubramanian is a former Civil Servant, now practicing as an Advocate and Partner with HSB Partners, Chennai. B. Sathyan is the Regional Programme Manager-APAC, Livingston International. Views expressed by the authors are personal.]