Monday, March 2, 2009

Administrative Arrest – Russian Customs Scam?

One of the most vexing – and costly – penalties that the Russian Federal Customs Services imposes is administrative arrest on import cargo. Administrative arrest is a procedure Customs uses to stop cargo about which there are suspicions of illegal or improper activities. Customs generally initiates the procedure while checking cargo documentation; if they find a discrepancy between measures affecting cargo valuation, such as cargo weight, volume or description, the cargo is placed under administrative arrest until the issue is resolved to the satisfaction of the Customs officers.

Here is an example from my days as manager in the Maersk Customer Service department in St. Petersburg, Russia. An American shipper – let’s call him US Cream – sent a shipment of coffee creamer to a consignee – Mr. Slivki – in Russia. Mr. Cream sent the shipment documentation to Mr. Slivki, who prepared to use it for customs clearance once the cargo arrived at the First Container Terminal in St. Petersburg.

However, after Mr. Cream sent the documentation, he noticed that he had made a minor mistake in the piece count; instead of 1800 cases of creamer, he had sent 1600 cases. Mr. Cream duly sent an instruction to Maersk to change the Bill of Lading to reflect the amended piece count. Maersk did so and re-issued the Bill of Lading.

The problems began because Mr. Cream just happened to amend the piece count while the cargo was already on its final leg of the journey to St. Petersburg. Every large international container carrier operates by the same scheme; they use a hub-and-spoke system to move cargo from one point to another. Hubs are linked by the largest container ships, called line-haul vessels, moving eight to twelve thousand containers at a time between, say, Newark, USA and Bremerhaven, Germany. Smaller ships carrying only a few thousand containers then pick up cargo destined for ports along the spoke lines. For example, Maersk Line serves the Baltic Sea with a rotation of four vessels – called Baltic feeders – that pick up cargo in Bremerhaven (or other north European ports) and bring it to St. Petersburg, Kaliningrad, Riga, and other ports.

Russian authorities require that foreign vessels submit a cargo manifest 48 hours prior to arrival in port. According to the Russian Customs Code, the party submitting a cargo declaration for customs clearance is responsible for its accuracy, and is fined should it submit an inaccurate declaration.

When Mr. Slivki took his documents to Baltic Customs at the First Container Terminal, he immediately ran afoul of this rule. The cargo manifest Maersk submitted to Customs 48 hours prior to its vessel call showed his container loaded with 1800 cases of creamer, but Mr. Slivki showed them documents stating there were 1600 cases of creamer in the container. The Baltic Customs officer placed the cargo under arrest until the documentation issue was clarified, and the cargo could be properly valued.

Unfortunately, for Mr. Slivki, Customs elected to store the cargo in the shipping container, and left it on the First Container Terminal, where it began to incur demurrage fees from Maersk (demurrage is a penalty container carriers charge to cargo owners for holding their container). Even worse, Russian Customs takes the position that, since the container carrier submits a vessel manifest to them to declare the type of cargo they are bringing into Russia, the carrier is responsible for the accuracy of the information on the manifest. So even though the discrepancy between the cargo manifest and the Bill of Lading was not caused by Maersk, Customs still demanded payment of a fine amounting to $3000 before releasing the cargo. In fact, Maersk warns on its website about changing any cargo measures after a container has departed Bremerhaven to avoid exactly this situation.

The situation quickly went from bad to worse. Mr. Slivki refused to pay the fine, citing the fact that Mr. Cream made the mistake that caused the cargo to be arrested, and the fine to be levied. Mr. Cream refused to pay the fine, claiming that he was only the cargo shipper and not liable for anything that happened to the creamer once it landed in Russia. I exhausted myself trying to sort through the situation, and all the while, the container sat in the First Container Terminal, running up demurrage charges. Worst of all, the creamer had an expiration date, and this put an effective deadline on the negotiations.

I wish I could say it ended well, with everybody coming to a rational conclusion for the event; however, when I left St. Petersburg that year, negotiations were stalled and there was no end in sight. The creamer would never be allowed to enter Russia, since its expiration, date had long since passed, and the container continued to grind away on the terminal, taking up space and draining $50 a day away from the company.

Was this an isolated incident? By no means; in fact, at any time, between five and ten percent of all containers at the First Container Terminal in St. Petersburg are under administrative arrest. Put another way – if the First Container Terminal handled 312,000 import boxes in 2008, then between 15,600 and 31,200 of them fell under administrative arrest. Each one of these boxes represents an enormous amount of what people in the shipping industry call frustrated cargo – cargo that cannot move for one way or another, that clogs up the transportation system, and takes up space that could be used more profitably. Container carriers make their money by turning containers as fast as possible, not by charging demurrage fees to their customers. And – as the case of Mr. Cream and Mr. Slivki illustrates – nothing kills a good deal faster than running afoul of the rules in Russian Customs.

Yet there is a winner in the situation – the Russian Federal Customs Service. Not only do they collect a fee of $3000 from each container (potentially $93,600,000 in 2008 if the 10% number of arrests held true that year) but, according to anecdotal evidence in the Russian press, administrative arrest is used as a cover for a system of collusion, bribery and kickbacks between corrupt Customs officers and unscrupulous businesses. Rather than innocent victims caught inadvertently in a web of their own making, administrative arrest covers a cargo confiscation scheme revealing the most cynical gaming of the system.

This very revealing material appeared as a blog by Vitya on the kompromat.ru website on September 15, 2007, and was read widely in St. Petersburg shipping circles.

“The so-called ‘confiscation scheme’ continues to be in active use, and from the moment criminal charges began to be filed with the Customs investigations department under Russian Federation Criminal Code statute 188, it has grown to enormous proportions. Through Baltic Customs alone between 250 and 300 containers [with contraband are imported] every month, which, expressed in financial terms carry cargo worth around $50 to $60 million dollars, resulting in losses to the [Russian Federal] budget of approximately $20 to $30 million dollars [in customs duties].
“The essentials of the ‘confiscation scheme’ are as follows: A cargo shipping container arrives with contraband goods, and trusted Customs officers are in on the scheme. Upon arrival of the container, and even before the cargo declaration is registered, the container is inspected by order of the Customs chief – and, during the Customs inspection, at which the cargo consignee is not present or represented, the presence of contraband cargo is established. A protocol instituting an administrative case against the cargo is written, and the cargo is arrested.
“Thereafter the arrested cargo, by order of the Customs chief, is removed to bonded warehouses run by ATP-7, or Pra-LTD, Baltimor, Merkurij or Sodruzhestvo. During the next month, fictitious investigative activities are carried out, the result of which is an order for the immediate sale of the arrested cargo, because naturally neither the cargo consignee, the shipper, nor any of their representatives has any chance of stopping this. Then Baltimor, Merkurij, Pra-LTD or Sodruzhestvo buy the cargo through a series of shell companies, complete the sale on paper but actually return the cargo to its real owner. The cost of the scheme is about $15 to $20 thousand dollars [per container], of which about $10 thousand dollars goes to the [Russian government] budget – between 10 and 15 times less than the actual amount of cargo duty [if the cargo were declared officially]. The balance goes to the corrupt Customs officials as thanks for their help in carrying out the scheme.
“The most surprising thing is that, by using this scheme, practically everybody makes out and nobody is in any danger at all. Customs shows high results in detaining contraband goods – although it is true that the scheme only applies to consumer goods, and for some reason cigarettes, alcohol, and rare and valuable materials are never touched. The Prosecutor’s office carefully and honorably ensures the observation of legality by prosecuting criminal cases according to statute 188, which, for some reason, never seem to make it to court and remain unsolved. And commercial players who own the confiscated goods reap huge profits and have dependable channels for bringing contraband goods into the territory of the Russian Federation.
“If you consider that during the first half of the year, Baltic Customs detained over 500 containers with consumer goods, then it follows that the participants in the scheme earned profits in excess of $20 million dollars, while the government in turn lost over $50 million in customs duties. An analogous situation obtains in the Far East Customs Region.”

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