Crisis Looms in European Community Transit System

By Michael Babb -- Logistics Management, 1/1/1998

London--A recent Committee of Inquiry report to the European Parliament recommends drastic steps be taken to curb what it calls "widespread fraud on the part of organized criminals" who are taking advantage of the outdated European Community Transit System to avoid paying billions of dollars in excise taxes and duties. Jean Duquesne, who generally is credited with the initial design of the transit system, testified before the committee that "the present situation conceals massive and steadily increasing fraud [that] amounts to the rapid development of a 'gray' market throughout Europe's economy...the situation is extremely dangerous for everyone...it is likely to jeopardize the achievements of the single market."

Founded in 1968, the Community Transit System (CTS) was created to permit goods entering what was then known as the European Community to defer tax payment until the goods either exited the Community or reached the country of destination. CTS originally served six countries. Today it handles a much larger volume of trade with 23 countries, yet its structure has remained virtually unchanged.

The basic working document of CTS is the T1 form, which is presented when the goods enter the European Union (EU) and then is matched with a receipt--the so-called Copy 5--when they either exit the EU or enter free distribution within an EU country. Copy 5 documents are supposed to be issued within eight days after the goods enter the EU.

The problem is, of the nearly 18 million CTS transactions per year, more than four million Copy 5s are never returned. Although much of this is due to paperwork overload, there are strong indications that a substantial portion can be attributed to fraud. Even if the Copy 5s are returned on time, moreover, that is no guarantee that the transactions have been properly discharged. The customs stamps often are forged or obtained by bribe, and the slowness of the paper-based system ensures that fraudsters can repeat their transactions numerous times without fear of being detected, much less caught. At least half of the losses involve cigarette shipments; other shipments frequently involved are dairy products, meat, animals, alcohol, food, and textiles.

Who pays for all of this? CTS requires the freight forwarder to guarantee payment of taxes on the goods in the event customs does not collect them, so forwarders bear the primary financial burden for the system's failure. It appears that a number of them have fallen into serious financial difficulties and are technically insolvent, saved only by customs authorities' reluctance to press claims against them. A spokesman from FreightForward Europe told the committee: "If all outstanding duties resulting from fraud and transit were to be collected, a large number of forwarding companies would go bankrupt."

Ironically, the introduction of the Single Market in 1993 has made the problem worse. With fewer checks on transit operations and fewer customs personnel to handle the workload, criminals find it's easier to perpetrate fraud.

The committee has recommended a number of steps to improve CTS. At the forefront is a proposal to computerize the system. Other key recommendations include:

* Reforming the guarantee system, including spreading financial responsibility to both owners and freight forwarders;

* Initiating a system of physical checks based on risk analysis;

* Allowing only "reliable operators" to handle sensitive goods such as cigarettes and alcohol;

* Linking European legal and customs systems more closely; and

* Taking firm community action against "countries whose legislation contributes to problems encountered in the transit system." In particular, the committee singles out Switzerland and Cyprus as countries that have legal systems that foster transit-system abuses.