Illicit Trade and the World Trade Organization: Raising awareness, identifying limitations and building strategies

As the first step in the direction of encouraging a worldwide response, this Memorandum intends to raise global awareness of the significant problem that illicit trade represents. To that end, it will refer to the international instruments currently available to fight against this collective threat, making the inevitable conclusion that international regulation has not only been fragmented, but also insufficient vis-à-vis this subject-matter. As a second specific objective, it will also present the available tools to tackle the issue, incorporating this subject matter into the WTO’s framework. Intrinsically intertwined with this goal is the suggestion of a broad definition of “illicit trade”, which is specifically designed for its use at the WTO.
 

 

Executive Summary

 

The global threat of illicit trade is clear and present. Attempts have been made at certain international organizations and international fora to tackle the problem. These efforts have been partial, fragmented and insufficient. The subject matter, surprisingly, has not been incorporated into – and is presently not on – the WTO Agenda.

 

Part I: Raising Awareness 

 

Aiming at stressing out the necessity of stopping abuses to the international trade law regime by fraudulent actors, this Memorandum presents concrete examples that illustrate the seriousness and complex spread or extent of the global threat of illicit trade in today’s world. Through the study of practices associated with substandard, spurious, falsely-labelled, falsified or counterfeit medicine (SSFFC Medicine); illegal unreported and undocumented fishing; prohibited trade in wildlife and endangered species; pillaging and commerce of cultural objects; and trade-based money laundering, it can be seen that fraudulent conducts may be observed all around the world: from North America to Southeast Asia, from Latin American to Europe, from the Persian Gulf to Africa. As a worldwide phenomenon, this Memorandum presents a clear idea: “illicit trade” requires nothing less than a global response.

 

Part II: Identifying Limitations

 

Attempts have been made at certain international organizations and international fora to tackle the problem. These efforts have been partial, fragmented and insufficient. The subject matter, surprisingly, has not been incorporated into – and is presently not on – the WTO Agenda.

 

The external (non-WTO) treaties examined by this Memorandum with regard to (multiple kinds of) illicit trade are, concretely: the WHO Protocol, the CITES, the UNTOC Firearm Protocol, the Convention on Psychotropic Substances (1971), the UNTOC Human Trafficking Protocol, the Berne Convention and the Paris Convention. In turn, the external (non-WTO) international instruments analyzed herein are: The Memorandum of Understanding between the WCO and INTERPOL, the WCO Dubai Declaration of the Fourth Global Congress on Combating Counterfeiting and Piracy; the WCO Resolution of the Customs Co-Operation Council on the Role of Customs in Preventing Illicit Trafficking of Cultural Objects; the WCO Resolution of the Customs Co‑operation Council concerning the prevention of illicit traffic in endangered species of wild fauna and flora; the Declaration of the Customs Co-operation Council on illegal wildlife trade; the Declaration of the Customs Co‑operation Council on the illicit traffic in drugs (Brussels Declaration); the OECD Public Governance Committee’s Task-Force “Countering Illicit trade”; and the INTERPOL’s Press Releases in “Operation Pangea” (against “illicit medicine”) and “Operation Maya” (against transnational organized crime engaged in traffic of illicit goods).

 

The analysis of the above-referred treaties and other international instruments shows that illicit trade lacks a comprehensive regulation and a strong enforcement / dispute settlement mechanism.

 

At the WTO, the legal framework of that international organization also evidences that illicit trade has not been explicitly addressed. Furthermore, the concept of “illicit trade” has not been comprehensively defined for use at the WTO.

 

It is true that the WTO’s primary purpose is trade liberalization, although it is not less true that the international trade system is founded on the goal of promoting licit and fair trade. Through the analysis of the relevant WTO rules, this Memorandum identifies the opportunities and limitations (“pros and cons”) of using the current WTO legal framework to fight against illicit trade.

 

As one of the major limitations, this Memorandum studies the determinations of the Appellate Body vis-à-vis illicit trade. Such organ has concluded, inter alia, that illicit trade is not carved out from the WTO obligations (in particular, from the customs duties liberalization commitments in Article II, GATT). Although Article XX, GATT, allows for a Member State to invoke certain exceptions to defend a challenged measure that is inconsistent with Article II, GATT, this strategy has not succeeded in WTO disputes where illicit trade was analyzed. Consequently, States’ measures designed to fight illicit trade have proven to be unsuccessful, as they have been considered as impeding trade liberalization and violating existing WTO-obligations.

 

The relevant WTO rules that are examined in this Section are: Articles II and XX, GATT; the exceptions clause to GATS; the TRIPS Agreement; the Customs Valuation Agreement (CVA); the Agreement on Technical Barriers to Trade (TBT Agreement); the Trade Facilitation Agreement (TFA); the Generalized System of Preferences (GSP); and the Government Procurement Agreement (GPA).

 

Part III: Building Strategies

 

As a result of Parts I and II, respectively, this Memorandum presents the WTO with a choice: it can deal with illicit trade, by means of adopting a comprehensive international instrument that directly regulates the subject-matter (after all the WTO is the “house of international trade” and, hence, the most appropriate international forum to address the issue) or it can allow Member States to exclude such fraudulent and non-licit practices and conducts from their obligations and commitments.

 

What the WTO cannot do, however, is continue to ignore the gravity of this global threat and its “clear and present” nature in today’s world.

 

Member States, in turn, can undertake to effectively fight against illicit trade. This means building comprehensive strategies through the assessment of legal alternatives or options to combat illicit trade.

 

That list of options or “menu of alternatives” that is presented distinguishes between two different scenarios. In “Scenario A”, a working definition of illicit trade is suggested for the specific circumstances in which the WTO decides to directly regulate the subject matter. This working definition reads as follows:

 

“Illicit trade means any commercial practice or transaction related to the production, acquisition, sale, purchase, shipment, movement, transfer, receipt, possession or distribution of:

 

(i) any illicit product defined as such by international law; or

 

(ii) any licit product for non-licit purposes as defined by international law[1]

 

Illicit trade also covers any conduct intended to facilitate such activities.”

 

This comprehensive definition of “illicit trade” – it should be noted – is suggested for specific use at the WTO.

 

In “Scenario B” (the scenario that deals with the circumstances in which the WTO chooses not to directly regulate illicit trade), formal legal mechanisms and other flexible or non-legal (“informal”) tools are presented to the Beneficiary. These tools intend to move for a “redesign” or “in-application” of current WTO rules vis-à-vis the situation in which a Member State attempts to adopt measures to fight against illicit trade.

 

The formal tools are: (i) an authoritative interpretation of the Marrakesh Agreement establishing the World Trade Organization, in which the terms “trade relations” are to be constructed vis-à-vis the notion of “illicit trade” with the objective of excluding the latter; and (ii) a waiver from obligations and commitments arising out or in connection with WTO treaties in force when Members are attempting to fight against illicit trade.

 

The informal tools are: (i) the organization (for a second time) of a session at the WTO’s public forum or a joint symposium with regard to illicit trade; (ii) the submission of proposals to counter the global threat at the General Council and specific councils; and (iii) the issuance of a World Trade Report and/or a joint study.

 

1.   Illicit Trade: A worldwide phenomenon

 

 “Illicit Trade” is a global problem. It abuses the international trade system and negates the foundations of the multilateral legal framework. “Illicit trade” destabilizes institutions, recognizes no frontiers and nullifies the collective objective of fair trade. And, yet, it is not on the WTO’s agenda.

 

The reality of today’s world shows that illicit trade is all around us: from the falsified medicines containing no active ingredients being brought to treat patients in North America, to illegally-captured fish products being acquired by consumers in Asia. This is, indeed, a serious matter.

 

Illicit trade practices often defeat the object and purpose of trade liberalization, which is to create development and wealth-sharing among States. Illicit trade does not contribute to the States’ economy the way licit trade does as it does not go through the ordinary (legal) channel.

 

The conundrum of “illicit trade” starts with its very definition. The notion of “illicit trade” encompasses a broad variety of issues, ranging from the cross-border sale of illicit products (such as narcotics) to the sale of licit goods for illicit purposes (such as money-laundering). To make things worse, no comprehensive definition thereof exists at the international level. Preliminarily, illicit trade has been defined as an exchange in the control / possession of a good or service that a lawmaker (national or international) deems illegal, because the object of the exchange is dangerous or morally repugnant.[2]

 

Nonetheless, if one uses only the above-referred preliminary definition, illicit trade would solely cover trading of prohibited weapons, endangered species, illicit timber, narcotics or conflict minerals. However, traditional illicit goods are not currently the sole issue at stake, albeit part of the considerable problem. It is often the case that fraudulent actors engage in sophisticated schemes through which they trade or deal with licit products (such as electronics or footwear) for criminal or otherwise non-licit purposes (like money laundering).

 

It is estimated that illicit international trade amounts to roughly $650 billion, taking into account – only – trade in goods. Illicit financial flows are on the order of $1.3 trillion. Moreover, the “illicit economy” represents approximately 15% of the world’s GDP and 7% of the world’s circulating merchandise.[3] It, thus, has the potential of impacting, in a negative way, both the major and the small economies of our planet alike. To illustrate why this is, truly, a worldwide phenomenon, below are a few examples that evidence the wide-spread extent of the problem.

 

Substandard, Spurious, Falsely-labelled, Falsified and/or Counterfeit Medicine (SSFFC Medicine)

 

Trade in SSFFC medicine is, truly, at a frightening level now.[4] Some non-profit and non-governmental institutions[5] have even noted that the practice of illicit trade of SSFFC medicine is worse than imagined, due to scarcity of reliable sources of data that can be used to assess the magnitude of the problem.[6] For an example of the problem, in 2014, INTERPOL and local enforcement agencies seized 8.4 million doses of counterfeit and unlicensed medicine worth estimated GBP 18.6 million in the United Kingdom alone.[7]

 

Aside from its adverse economic impact, trade of those medicines also poses health risks to certain groups of people, especially (albeit not exclusively) in North America. This is due to the fact that SSFFC medicine does not – generally – contain active ingredients.[8] The concern about trade in counterfeit medicine was recently raised at the WHO, reflecting the grave and imminent nature of the problem.[9] However, despite those efforts, an effective international legal framework to deal with this kind of illicit trade is still needed.

 

Illegal, Unreported and Unregulated Fishing

 

Illegal, Unreported and Unregulated (IUU) Fishing is a major concern for coastal States. Transnational criminal organizations operate in the fishing and fisheries industries by means of, inter alia, illegally entering into a State’s exclusive economic zone and overfishing their waters. It has been reported that trade in illegal fishing products (connected to criminal organizations’ actions) amounts to somewhere in between 10 billion and 23.5 billion dollars per year.[10] In Southeast Asia, canned fish-products are often traded internationally when fish were the product of non-licit capture. Although there may be regional arrangements dealing with this fraudulent conduct, this criminal practice requires a global framework.[11]

 

IUU fishing practices by transnational criminal organizations have also been linked to human trafficking and modern slavery.[12] IUU fishing, as a major kind of illicit trade, calls for immediate global attention: it is not just a resource-management problem, but also a matter connected to transnational organized crime. Overfishing by fraudulent actors not only disrupts the sustainability of ecosystems, but also undermines the means of subsistence of local fishers.

 

Trade in Endangered Species and Wildlife Trafficking

 

Trade in endangered species and wildlife trafficking has – for a long time – been one of the most lucrative illicit trade businesses in Africa. “Good quality” raw elephant tusk can be priced around 1,100 dollars (and above) per kilogram.[13] Studies suggest this was the cause of the over 95% decline in the African elephant population over the last century.[14]

 

In order to reduce the numbers of wildlife trafficking, African States have put export quotas on certain wildlife products, such as ivory.[15] Because the sale of ivory is not legally prohibited as such in certain States, transnational criminal organizations operating in Africa smuggle wildlife products elsewhere to avoid export quotas. In addition to the problems associated with this illicit trade practice, without adequate technology it is virtually impossible to monitor, secure and deter illicit trade and smuggling schemes in endangered species and wildlife trafficking.[16] This matter too requires a global response.

 

 

Cultural Objects

 

The pillaging and subsequent commerce of cultural property conducted by terrorist organizations in the Persian Gulf, has been a matter of continued international concern. Illicit trade of cultural property (including cultural heritage) has been condemned through various UN Security Council Resolutions.[17] The most recent resolution has affirmed that illicit trade of cultural property is related to the financing of terrorism. Although the WCO has adopted resolutions on the subject-matter,[18] additional collective measures at a global scale vis-à-vis the international trade regime are much needed to effectively address this issue from a “global trade” perspective.

 

Money Laundering

 

Although not the only way through which fraudulent actors engage in money laundering schemes, the under-invoicing of ordinary goods, such as electronic appliances, has proven to be used for money laundering purposes. Latin American States have been particularly (albeit not exclusively) affected by these fraudulent practices.

 

Commentators often use the same example to illustrate the complexity of the conducts, which can be summarized as follows. Think about a drug dealer selling illegal substances and making $100,000. With this amount, the dealer then buys 1,000 electronic appliances at $100 per unit. The dealer exports its 1,000 appliances at a declared price of $10 per unit to a colluding importer, who pays $10,000. The importer then sells the 1,000 appliances at $100 per unit, and gets $100,000 (or its equivalent in local currency) for the dealer. Customs duties were paid for the export price of $10,000, when the real value of the exports was $100,000. After completing his money laundering scheme, the dealer has $100,000 (less any commission) at his disposal. What happens next? This dealer finances terrorism (without having to use the financial system) with the illegal proceeds of the trading of ordinary textiles.[19]

 

Other trade-based money laundering schemes, include the declared import of “machinery” with inaccurate invoice pricing (of over a million dollars), which in reality turns out to be only a “heap of a scrap metals”.[20]

 

Evidently, not every fraudulent actor uses those specific schemes. Other examples include, inter alia, the multiple invoicing of financial services to a governmental agency or overstated weights or over-invoiced exports.[21] The point to understand here is, that transnational criminal organizations now have the ability to use and abuse legal loopholes to sustain their activities or to gain non-licit benefits, abusing the current framework.

 

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The concrete examples presented above serve to illustrate the seriousness and complex spread or extent of the global threat of illicit trade in today’s world. Fraudulent conducts were seen from North America to Southeast Asia; from Latin American to Europe; and from the Persian Gulf to Africa This is a worldwide phenomenon and, as such, requires a worldwide response.

 

The purpose of this Memorandum

 

As anticipated in this Memorandum’s Introduction, not only has Illicit trade not been comprehensively defined at the international level, it has also been partially and deficiently regulated. International organizations and international fora have attempted to address only some of the conducts associated with illicit trade (combating specific forms thereof), hence, failing to establish a wide-ranging framework to tackle the issue.

 

As the first step in the direction of encouraging a worldwide response, this Memorandum intends to raise global awareness of the significant problem that illicit trade represents. To that end, it will refer to the international instruments currently available to fight against this collective threat, making the inevitable conclusion that international regulation has not only been fragmented, but also insufficient vis-à-vis this subject-matter. As a second specific objective, it will also present the available tools to tackle the issue, incorporating this subject matter into the WTO’s framework. Intrinsically intertwined with this goal is the suggestion of a broad definition of “illicit trade”, which is specifically designed for its use at the WTO.[22]

 

As an important clarification, it is crucial to understand that this Memorandum is not concerned with domestic measures, laws or regulations of any Member State (whether consistent or not with the WTO’s legal framework). Similarly, it does not purport to examine bilateral or regional agreements (or arrangements) dealing with this subject matter. Rather, in accordance with the global perspective that the scrutiny of a global threat demands, it will only present multilateral treaties and other international instruments to which all States are eligible to become parties to or to join.

 

The Illicit Trade’s Definitional Conundrum

 

The term “illicit trade” – and the use thereof by States – is not novel. It can be traced back to the enactment of “The new Trade Barrier Regulation” in the EU in 1994.[23]However, the oldest definition of “illicit trade” incorporated in a document of an international intergovernmental body can be found in the EC Regulation ‘on the strengthening of the common commercial policy with regard in particular to protection against illicit commercial practices’, a regulation by the Council of the European Community adopted in 1984.

 

As relevant here, this document states that “illicit commercial practices shall be any international trade practices attributable to third countries which are incompatible with international law or with generally accepted rules”.[24]

 

The above-referred definition serves as an illustrative example of the ambiguity that has surrounded not only the adoption of the earlier definitions of “illicit trade”, but also the determination of which conducts – in fact – constitute “illicit commercial practices”.

 

The lack of a comprehensive international definition of illicit trade may be, naturally, explained by a wide range of reasons. One of these reasons relates to perceptions of States having different interests at stake. Since – historically – States have experienced illicit trade in distinct ways (they have been affected by dissimilar non-licit abuses to trade), the adoption of a collective definition has not yet crystallized.

 

This perception needs to change. Of course, States are affected in different ways by illicit trade. The fundamental threat affecting one State may not be the major problem of another. For the EU and China, illicit traffic in waste and counterfeit goods may very well be the most important issue[25]. For Latin American States, it is perhaps the fight against money laundering which represents the most problematic conduct.[26] For the US, illicit trade in pharmaceutical products raises concerns about IPRs protection and the safety of the products.[27] Nonetheless, what needs to be understood is that there is a common interest behind the specific – albeit diverse – ways in which States are affected. The fight against the abuse of the international trade system by fraudulent actors equally concerns all States around the globe. It is, thus, not a struggle of one or very few States, but a collective problem of the international society as a whole.

 

This international approach to the common threat of illicit trade by no means ignores the different cultural contexts and legal frameworks that interact in this global fight. INTERPOL, for example, has acknowledged that what is considered as illicit trade “depends on the cultural context and legal framework established by individual states organization”.[28]

 

Thus, the problem is not having different approaches or tools to combat this fight at the domestic level, but rather the lack of consciousness over the necessity of the adoption of broad definitions at the international level.

 

Efforts have been made by some international organizations and international fora to tackle some of the conducts associated with illicit trade. However, it is a truism to say that these attempts have been partial, fragmented and insufficient. This will be evidenced in Sections 1.2.1., 1.2.2. and 1.2.3. bellow.

 

The international society’s attempts to address the issue of illicit trade can be classified into two categories: (a) trade of illicit goods and (b) trade of licit goods for illicit – or otherwise non-licit – purposes. The next Sections will, hence, elucidate on the partial, fragmented and insufficient character of the international regulation of illicit trade bearing in mind this distinction.

 

1.2.1. Trade of Illicit Goods and Services: A definitional approach
 

One of the ways in which the international society has dealt with illicit trade is by convening international instruments prohibiting or condemning the trade of specific goods.

 

The WTO, evidently, was not the first international organization to use the term “illicit trade” in its conventional law. The WHO, in its Framework convention on tobacco control [29] as well as in its Protocol to Eliminate Illicit Trade in Tobacco Products (WHO Protocol), employed the locution in line with the general goal of containing the spread of tobacco consumption. The WHO defines illicit trade of this product as:

 

any practice or conduct prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase, including any practice or conduct intended to facilitate such activity’ related to the tobacco products (emphasis added)”[30]

 

The object and purpose of these WHO instruments aimed at reducing concealed manufacture and traffic of tobacco products by imposing an obligation to excise every tobacco product.[31]

 

Unlike these WHO instruments, other international instruments dealing with traffic of certain non-licit goods do not attempt to define the concept of illicit trade. By way of example, Article I of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES),[32] does not define the scope of the term ‘trade’ as the goods themselves are non-tradable under this Convention.

 

The WHO Protocol deserves further mention. Although tobacco is generally harmful, it is still tradable (the States’ ability to monitor the spread of the goods imposing excise on the product allows for its trade). By contrast, CITES does not limit “trade” because the non-tradeable nature of the goods is clearly determined.[33] For example, trade of goods mentioned in Annex I of CITES is illegal irrespective of whether it was traded in a formal way or in the black market, and this irrespective of the purpose of the trade.

 

Similar to the WHO Protocol, the Convention on Psychotropic Substances of 1971 [34]and the Protocol against the Illicit Manufacturing of and Trafficking in Firearms, Their Parts and Components and Ammunition, supplementing the United Nations Convention against Transnational Organized Crime (UNTOC Firearms Protocol)[35]attempt to incorporate relevant definitions. This Convention defines “illicit traffic” as the “manufacturing or trafficking of the substances” that are contrary to the provisions of this Convention.[36] Similarly, the UNTOC Firearms Protocol defines “illicit trafficking” as “the import, export, acquisition, sale, delivery, movement or transfer of firearms without authorization of the export target State Party”.[37]

 

But perhaps the most advanced approach to trade of illicit items was taken in respect to intellectual property rights’ protection (IP Rights). The international framework of IPRs started with dispersed international instruments defining numerous IPRs such as the Berne Convention for the Protection of Literary and Artistic Works (1886) (Berne Convention);[38] the Convention of Paris for the protection of industrial property of March 20 1883 (Paris Convention);[39] the Trademark Law Treaty (1994);[40] or the UNESCO Universal Copyright Convention[41]. The issue of enforcement of all those conventionally-recognized rights was then covered by a single agreement called the Agreement on Trade-Related Aspects of Intellectual Property Rights.[42] However, the concept of illicit trade under this framework is merely limited to trade conducted in violation of the defined IP Rights, hence, far from exhaustive.

 

Illicit trade practices, of course, not only cover trade in goods but also trade in services. Although the Protocol to Prevent, Suppress and Punish Trafficking in Persons Especially Women and Children, supplementing the United Nations Convention against Transnational Organized Crime (UNTOC Human Trafficking Protocol) condemns the recruitment or transfer of a “trafficked person”, it is nonetheless hard to identify, in practice, illicit trade in services.[43] Trafficked persons may, at first sight, be assimilated to illegal migrants, as they both entered illegally into a State’s territory. However, illegal services offered by trafficked persons are not only differentiable from services offered by illegal migrants, but also a considerable problem. The International Labor Organization estimated that there are 20.9 million people engaged in forced labor in which 4.5 million of those are sexually exploited.[44]

 

Another vague definition is provided by the OECD Task Force – Countering Illicit Trade. In this document, it is argued that illicit trade could be defined as “an exchange in the control / possession of a good or service that a legislature deems illegal, because the object of exchange is dangerous or morally repugnant’.[45] The OECD’s definition, nonetheless, is perhaps too vague in the sense that every good that is illegal for a “legislature” is encompassed therein. Obviously, this definition is, at the same time, narrow because it only covers “illicit products”, but not licit products for illicit or otherwise non-licit purposes.

 

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In order to facilitate the comprehension of the available treaties to fight against illicit goods and illicit services, the following Chart presents an illustrative summary thereof:

 

 

 

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Up to this point this Section has presented the treaty-based mechanisms that provide for ways to address and fight against the trade of illicit goods and services. However, non-treaty-based mechanisms offer a yet broader scope. Within the WCO framework, for instance, some of the illicit goods covered are Counterfeit Products,[46] Cultural Objects,[47] Endangered Species,[48] and Psychotropic Drugs.[49]

 

On measures relating to illicit trade of endangered species, for example, the WCO initially called for cooperation with and among Member States, as well as with the CITES Secretariat.[50] Subsequently the WCO members established a Committee to implement action plans designed or adopted by the international organization.[51]

 

Regarding cultural objects (which are also the core subject of the UNESCO Convention on the means of prohibiting and preventing the illicit import, export and transfer of ownership of cultural property, 1970), a resolution of the WCO has endorsed cooperation between diverse stakeholders (States, academia, NGOs, and private sector) for the purposes of exchange of information.[52]

 

On the issue of piracy (counterfeit products), the WCO has worked alongside with WIPO, INTERPOL – and even the privately-composed ICC – to make “appropriate recommendations”. The Dubai Declaration on the Fourth Global Congress on Combating Counterfeiting and Piracy, 2008, by way of example, encourages the adoption of legislation (and its enforcement), as well as capacity building and awareness raising initiatives.[53]

 

As to the illicit trade of psychotropic drugs, the WCO has emphasized the need for more international scrutiny, especially, as they are often closely intertwined to trade activities related to international terrorism.[54] The WCO has also reiterated the importance of fostering more cooperation with other international organizations.

 

Aside from the non-treaty-based mechanisms mentioned above, it is also worth noting that the WCO publishes an annual report on illicit trade.[55]

 

 

1.2.2. Trade of Licit Goods for Illicit (or otherwise Non-Licit) Purposes: A definitional approach
 

 Unlike the international instruments referred to above (which directly prohibit or condemn specific goods), the international instruments referred to in this Section are to be read from a purpose-oriented approach, thus, covering a broader scope of goods.

 

The United Nations Convention against Transnational Organized Crime (UNTOC Convention)[56] although not addressing directly illicit trade, criminalized the conduct of money laundering, as a component of organized cross-border crime. Article 6 of the Convention, in particular, requires a State Party to criminalize the act of:

 

“(a) (i) The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action;

 

(ii) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime; (emphasis added)”[57]

 

Because of the sophisticated mechanisms employed by fraudulent actors (such as transnational criminal organizations), benefits that are obtained through crime can often be conversed and concealed with legitimate business transactions in the course of international trade.[58] This Convention is, thus, closely intertwined with the fight against illicit trade and, particularly, against the trade of licit goods for the illicit purpose of money laundering.

 

This Convention has, however, limitations as to the scope of its application. It is only applicable to matters related to serious transnational offences by organized criminal groups.

 

Unlike the UNTOC Convention’s approach to illicit trade, the International Convention for the Suppression of the Financing of Terrorism approach is more direct. Article 2 of the Convention condemns trade in any goods (irrespective to their legality), as soon as they are used for the financing of terrorism. This is reflected by the use of the following terms, which aim at the incorporation of an all-inclusive prohibition:

 

“[…] by any means, directly or indirectly, unlawfully and willfully, provides or collects funds with the intention that they [will be used to conduct terrorism] (emphasis added)”[59].

 

It further defines funds in a broad way that includes any kinds of assets, whether tangible or intangible, movable or immovable.[60]

 

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The preceding examples serve to elucidate how partial, fragmented and insufficient the regulations at the international level are with regard to illicit trade. The matter is far from being comprehensively or unambiguously addressed. Figure #1 below shows how fragmented the international instruments are. Naturally, the problem with insufficient regulation does not stop at the definition, but it is the definition – a truly comprehensive one – that best sets the path in the right direction.

 

Figure: Definitional overlap of the concept of Illicit Trade

 

This figure shows the following key points: first, the framework under the auspices of the WCO covers the issue of illicit trade on counterfeit products, arms and weapons, narcotics and psychotropic substance, excisable goods, environmentally sensitive goods and money laundering.[61] Second, the UNTOC Convention only convers money laundering, weapons and arms, and drugs; with (possibly) the addition of illicit trade related to human trafficking.[62] Third and on a broader level, the Financing of Terrorism Convention covers broadly all trade activities related to aiding terrorist activities. Lastly, the OECD’s suggested definition shows the scope of illicit trade in a vague, but narrow manner: it would encompass any good that is condemned under the law (“illicit goods”), but not licit goods for non-licit purposes.

 

 

Additional Problems: Enforcement and Dispute Settlement

 

Closely intertwined with the lack of comprehensive international definitions of illicit trade (which impacts the scope of the obligations of States) is the absence of effective enforcement and dispute settlement mechanisms. International law-making processes are often long and cannot keep-up with contemporary problems. The international society, therefore, increasingly uses non-treaty-based mechanisms to tackle some of the issues.

 

Most of the international instruments that deal with illicit trade of a criminal nature have enforcement mechanisms heavily dependent on the domestic system of each State. By way of example, Article 14 of WHO Protocol and Article 4 of the Financing of Terrorism Convention mutually oblige States Parties to criminalize illicit trade domestically whilst fostering cooperation at the international level (as reflected in Article 20 of the WHO Protocol and Article 18 of the Financing of Terrorism Convention).

 

Both the “identification”, as well as the “placing of measures” to tackle illicit trade at the border are, perhaps, the most effective ways to fight against this threat. As illicit actors across the globe become more organized and sophisticated in finding loopholes, cooperation among States is crucial. International fora that have resorted to non-treaty-based mechanisms are, among others, the WCO and the OECD.

 

The WCO, in particular, created an “Information & Intelligence Center” to collect and distribute open-source intelligence from each customs authority, encompassing more than the 98% of global trade.[63] Besides this international organization’s cooperation with INTERPOL (to deal with several aspects of illicit trade such as illegal logging, falsified medicines and illegal trade in cultural goods),[64] the WCO has also created a common space called the Customs Enforcement Network (CEN), where the customs authorities can report their enforcement measures (like seizures).[65] The INTERPOL also created the I-24/7 as a network for exchange of information between the police authorities around the world.

The OECD is another one of the leading international organizations attempting to fight illicit trade. With a comprehensive approach and aiming at the prevention of illicit financial flows, it has adopted several recommendations on current issues in illicit trade, such as money laundering, the financing of terrorism, and trade in illicit goods. To that end, it created a forum to enhance policy-oriented solutions on the subject matter: the OECD Task Force on Countering Illicit Trade.[66]

One of the best examples that have been established by the OECD is the Information Sharing Platform to combat illicit trade of wildlife in Sub-Saharan Africa. The Task Force on Charting Illicit Trade created “a common space” where myriad stakeholders like government experts, non-governmental organizations, Industries and Academia, can participate in a near real-time crowd-based mobile reporting.[67] The initiative is not only managed to identify cooperative and uncooperative stakeholders or States, but also managed to gather geo-tagged data that has not been “historically available”.[68]

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However, despite the flexibility that non-treaty-based mechanisms pose to tackle contemporary problems in illicit trade, it is worth nothing that non-treaty based mechanisms operate largely based on a voluntary commitment from States.

Because treaties create rights and obligations for States under international law, they are often equipped with dispute settlement provisions. Conventional law relating to illicit trade is no exception.

However, what is quite noteworthy – although perhaps not surprising – about these dispute settlements mechanisms on illicit trade is that none of them provides for a recourse within the “home” of international trade: the WTO. The ordinary dispute resolution mechanisms are rather negotiation, conciliation, good offices, or arbitration / submission of a case to the International Court of Justice.[69] 

 

2.   Illicit Trade at the WTO

 

Given that the WTO is the “standard bearer” of the international trade system, it is quite strange that this international organization does not have a (substantive) international instrument on illicit trade. Article V of the Marrakesh Agreement establishing the World Trade Organization explicitly states that the WTO can make appropriate arrangements for cooperation with other international entities to deal with matters related to WTO.[70]Such arrangements (if any) have not been effective. Even though prohibited conducts were enshrined in international instruments (such as the ones presented above, adopted outside the conventional law of the WTO), it is undisputed that the measures adopted by a State in the fight against illicit trade pertain to the international trade system.

Think about State A deciding to increase an import tariff by 35% for crude oil products from State B, as this product is the source of income of an international terrorist group that operates outside State A. If State B were to challenge State A’s measure (which evidently was based on international instrument such as the Financing of Terrorism Convention) where would the most logical place for this dispute be?

This problem illustrates the potential conflicts that may arise between international obligations derived from WTO law and duties or other commitments arising from other international instruments. While this issue may only be partially handled by using the “public morals” and “security” exceptions under Article XX and XXI of GATT (due to extraterritorial activities of the terrorist groups, outside State A), State A would probably have the legitimate interest to prevent activities of such groups with a trade-related measure. What can a Member State do then? What would happen in the circumstances in which State A’s measure was unsubstantiated? Should the case be settled at the WTO (even if State A’s measure was based on another treaty providing for recourse to the ICJ)?

To answer this question, this Section will address in detail the WTO’s current legal framework vis-à-vis illicit trade, along with its considerable limitations.

A number of WTO provisions may be of relevance in the fight against illicit trade. The mechanisms incorporated in those clauses present opportunities to build strategies, but also have limitations as to their success. The insufficiency of such provisions, hence, increases a growing concern over this global issue.

 

2.1. The GATT and GATS 

 

Illustrative Case: Member X would like to enact a domestic law regulating certain kinds of illicit trade. Member X’s measure is designed to combat global crime, but requires additional scrutiny to comply with WTO obligations. 

Illicit Trade Covered: Money laundering and smuggling.

The WTO has two principal agreements: the GATT and GATS. Trade in goods is governed by the GATT, while trade in services is regulated in the GATS. The primary purpose of the GATT and GATS is to facilitate trade liberalization. Governmental measures to fight illicit trade have the potential of being perceived as impeding trade liberalization and violating existing obligations, even when directed against illicit trade.[71]Measures adopted by States to counter this global problem must, therefore, be brought into alignment with core obligations of the WTO, such as National Treatment, Most-Favored-Nation Treatment, and Elimination of Quantitative Restrictions .[72] 

 

2.1.1. Interpretation of GATT Article II
 

 Crucial to this Section is the interpretation of GATT Article II.[73] This provision requires each Member to accord other Members tariff rates at or below the bound rates provided for in its respective Tariff Schedule. Colombia-Textile (DS461) is the leading case regarding the interpretation of Article II vis-à-vis illicit trade.[74] To counter smuggling and under-invoicing of textiles and footwear products arriving from a Member State for illicit purposes, the Respondent imposed a compound tariff upon those goods. The Complainant then instituted proceedings against the Respondent before the WTO.[75]

In the above-mentioned decision, the Appellate Body illustrated the scope of trade covered by Article II. In particular, the applicability of Article II:1(a) and (b) to “illicit trade” was analyzed. The Respondent argued that Article II:1(a) and (b) only covered licit trade, thus, excluding illicit trade (specifically, trade of licit goods for money laundering or smuggling purposes.)[76]

The Appellate Body, however, found that Article II:1(a) and (b) does not exclude illicit trade. It stated that the Respondent’s interpretation would allow a WTO Member to exclude trade activities that it has unilaterally determined to be illicit under its domestic law from the scope of Article II:1(a) and (b).[77] It concluded that the compound tariff exceeded the bound tariff rates in the Respondent’s Schedule of Concessions and was inconsistent with Article II:1(a) and (b).

This case illustrates that, in the Appellate Body’s view, illicit trade is not carved out from a State’s WTO obligations. This means that obligations of the GATT and GATS apply to both licit and illicit trade.[78] Moreover, illicit trade can be banned only if a measure meets specific exception provisions, an issue which will be discussed in the next part.  

  

2.1.2. Exceptions to the GATT and GATS 
 

Because illicit trade was not deemed to be carved out from WTO obligations, exceptions to the GATT and GATS are of vital importance to counter illicit trade. When a State uses trade restraints as part of its policy framework to tackle illicit trade, such restraints may, as the rules stand today, only be found WTO-consistent if they can be justified under the exceptions provisions in the GATT or GATS. A Member which is adversely affected can challenge these measures in WTO dispute settlement.[79]

 

2.1.2.1. General Exceptions

 

Illustrative Case: Even though Member X’s measure to combat illicit trade was found to violate obligations under the GATT or GATS, the Member X’s measure can be justified as general exceptions under the GATT or GATS.

Illicit Trade Covered: Money laundering, Financing of organized crime, and Illicit trade on tobacco and natural resources.

General exceptions under the GATT[80] and GATS[81] allow Members to deviate from their obligations and commitments. These exceptions represent an effort to reconcile trade liberalization with major national and international societal interests, permitting Members to pursue legitimate non-trade policy objectives.

When interpreting general exceptions, the Appellate Body has established a two-tier test.[82] The first tier assesses whether the measure is necessary to achieve the objectives specified in the exception, such as protecting public morals; human, animal or plant life or health; or securing compliance with WTO-consistent domestic law. On this point, it is worth noting that the Appellate Body has repeatedly accepted that money laundering and organized crime fall within ‘public morals’.[83] Once the measure has been found to be covered by a given exception, the second tier determines whether the measure is applied in a way which would not constitute a means of arbitrary or unjustifiable discrimination, or a disguised restriction on international trade under the chapeau of Article XX, GATT.

In Colombia-Textile (DS461), the question on whether the Respondent’s compound tariff (which was designed to combat illicit trade) was necessary to: (i) protect public morals under GATT Article XX(a); and (ii) to secure compliance with WTO-consistent laws or regulations under GATT Article XX(d), was addressed.[84]

Restrictions on Illicit Trade as “Public Morals” Measures (GATT Article XX(a))

The Respondent in Colombia-Textile (DS461) argued that its measure was “designed to combat money laundering” and that “money laundering [was] linked with drug trafficking and the financing of groups operating outside the law”.[85]

Generally, to fall within the public morals exception, a challenged measure is required to: (i) be designed to protect public morals; and (ii) be necessary to protect public morals.[86]

On this opportunity, the Appellate Body stated that the objective of combating money laundering reflects societal interests that can be described as vital.[87] It also found that Members have the right to determine the level of protection they consider appropriate and to have some scope to define and apply for themselves the concept of public morals in their territories, according to their own systems and scales of values. It further concluded that combating money laundering was one of the policies designed to protect public morals in a State.[88]

To determine whether the measure was necessary to combat money laundering, the Appellate Body found that relevant factors were to be weighted and balanced, such as (i) the importance of the fight against money laundering and (ii) the contribution of the compound tariff to the achievement of the objective of combating money laundering.[89]

Regarding (i), the Appellate Body stated that the fight against money laundering was a vital societal interest. As to (ii), it found that the Respondent had not demonstrated with sufficient clarity the degree or contribution made by the compound tariff to the objective of combating money laundering purposes,[90] which led to the conclusion that the Respondent had failed to demonstrate that the measure was “necessary” to protect public morals.[91]

 

Restrictions on Illicit Trade as Measures Securing Compliance with Domestic Money Laundering Laws (GATT Article XX(d))

The Appellate Body then examined whether the Respondent’s measure was necessary to secure compliance with a provision on money laundering incorporated in its domestic law.[92]

The Appellate Body found that the measure was designed to secure laws or regulations which are not inconsistent with the GATT under Article XX(d).[93] Subsequently, the Appellate Body examined whether the measure was ‘necessary’ to secure compliance with laws or regulations that are not GATT-inconsistent, within the meaning of Article XX(d). However, it found that the Respondent had not established the relevant factors with sufficient clarity.[94] Hence, it concluded that the Respondent had not demonstrated that the measure was necessary to secure compliance with regulations which are consistent with Article XX(d).[95] Given these findings, the Appellate Body found that it was unnecessary to examine the Article XX chapeau.[96]

Conclusion under GATT Article XX

While general exceptions, theoretically, provide legal tools for a State that attempts to fight against illicit trade within the WTO framework, the way in which panels and the Appellate Body have applied Article XX to illicit trade leads to a different conclusion in practice.

Measures directed to fight against money laundering or financing of organized crime may have been regarded as measures genuinely directed to protect public morals and to secure compliance with a Member’s law, but these efforts to defend such measures have not been successful.

This may be attributable to the fact that States have not effectively demonstrated that the specific measure is ‘necessary’. Among five WTO cases addressing illicit trade, four cases have failed to demonstrate the necessity test.[97] Since panels and the Appellate Body have the tendency to interpret “necessity” in accordance with the strict “weighing and balancing” standard,[98] almost all States have failed to demonstrate it.[99] Even if a Member demonstrates the “necessity test” (first tier) successfully, the second tier (chapeau of GATT Article XX) is considerably hard to demonstrate.[100] This is due to the fact that panels and the Appellate Body have consistently applied strict interpretation methods for exceptions, in particular, the weighing and balancing for the necessity, and the design, architecture and revealing structure of the measure for the chapeau. Therefore, under Article XX, GATT interpretations of ‘necessity’ and the ‘chapeau’ are real obstacles.

****

Because the WTO lacks substantive articles addressing illicit trade, other international legal instruments (those provided under Section 2) can play a modest complementary role when States adopt measures to combat illicit trade. However, despite their eventual significance, these conventions have not played a role in the WTO cases related to illicit trade; international law was absent, perhaps even ignored, at the WTO. Given their importance, these international instruments addressing illicit trade (albeit not comprehensive) must be considered by future panels and the Appellate Body in adjudicating similar controversies.[101] Hence, the exceptions clause should be interpreted in a manner that is supportive of the fight against illicit trade.

Panels and the Appellate Body have been reluctant to justify Members’ legitimate laws or regulations, such as measures to counter illicit trade, through the GATT general exceptions. The tendency (shown by decisions from both panels and the Appellate Body) fails to award sufficient value to fairness or deference to the checks and balances standard, which can be regarded as the original purpose of the WTO.[102]

<Pros>

<Cons>

ü Article XX covers many types of illicit trade, hence, providing an available tool to tackle illicit trade.

ü  The specific conditions under Article XX, in particular, ‘necessity’ and ‘chapeau’, are hard to demonstrate. 

3.1.2.2. Prudential Exception (GATS)

Illustrative Case: Member X can restrict specific financial services sectors for prudential reasons to combat, inter alia, the financing of terrorism, even when it has committed itself to open those sectors under its Schedule.

 

Illicit Trade Covered: Money laundering and Financing of terrorism.

This exception is only available for financial services. It allows a Member to adopt measures for prudential reasons, or in order to ensure the integrity and stability of the financial system.[103]

In Argentina-Financial Services (DS453), the Appellate Body found that, for a measure to be exempted for prudential reasons, three requirements were to be fulfilled: (i) the measure should affect the supply of financial services; (ii) the measure must be taken “for prudential reasons”[104]; and (iii) the measure shall not be used as a means of avoiding commitments or obligations under the GATS. Members have freedom to define the prudential reasons of their measures, which may include prevention of money laundering and financing of terrorism.[105]

The panel, albeit not the Appellate Body, actively considered the decisions and recommendations on the subject matter of other international organizations. These included recommendations from the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purpose, the Financial Action Task Force, the International Organization of Securities Commissions, and G-20 statements.[106] The prudential exception may, thus, be a legal tool to fight illicit trade within a State’s own financial sector.

However, there are limitations. Firstly, since the term ‘prudential reasons’ refers to the underlying reasons that motivate financial sector regulators to act to prevent a risk, injury or danger,[107] prudential reasons are closely related to financial system (as opposed to “trade”). Therefore, prudential exceptions are only applicable to illicit trade which could cause a risk, injury or danger to financial sector. This is, undoubtedly, narrow in scope.

Moreover, in Argentina-Financial Services (DS453), the Appellate Body rendered an extremely narrow decision that sheds relatively little light on the substantive issues in dispute. Panama’s appeal was limited to the scope of the exception. Other conditions were not appealed, hence, need to be clarified in future disputes. [108] Lack of relevant cases and interpretations would lead to the insufficient guidance for the prudential exception. Therefore, a Member which attempts to defend its prudential measure might find it difficult to use this provision.

Considering the fact that other international organizations have been actively adopting recommendations or statements against illicit trade in the financial sectors, and that money laundering is closely related to the financial system, panels and the Appellate Body should recognize the importance of this issue and actively incorporate other international organizations’ decisions or recommendations in future cases. This could be the first step of the WTO to show its willingness to counter illicit trade.

<Pros>

<Cons>

ü The Panel actively considered international instruments from other international forums.

ü Applicable only with regard to the financial system (not general “illicit trade”),, which is narrow in scope.

ü Lack of relevant cases and interpretations would lead to insufficient guidance for the application of prudential exceptions.

 

2.2. TRIPS Agreement

 

Illustrative Case: Member X can maintain its domestic law on IPRs, which comply with the minimum standards of the TRIPS Agreement.

Illicit Trade Covered: Counterfeit trademark goods and Pirated copyright goods (directly covered by the TRIPS Agreement).

 The TRIPS Agreement obliges Members to undertake positive obligations, unlike the GATT and GATS which impose negative obligations (not to impose tariffs or not to discriminate against other Members). Members have to comply with the provisions related to illicit goods, in particular, to ban certain imports of counterfeit trademark goods and pirated copyright goods.

The TRIPS Agreement sets out global minimum standards of IPR protection and enforcement, imposing specific obligations on Members when dealing with these kinds of non-licit goods.[109] Illicit trade at the WTO is squarely premised upon infringements of IPR with a focus on trade in counterfeit and pirated goods.

Illicit products under the TRIPS Agreement are illegal; they infringe IPRs. Because of the international standards set out in the TRIPS Agreement, IPRs are the rights common to both exporting and importing States. They are, hence, not just illicit in light of the perception of a single State.

The TRIPS Agreement is, however, ineffective for the purposes of countering illicit trade[110] due to domestic enforcement commitments.[111] The TRIPS Agreement establishes general standards to be implemented according to the domestic framework determined by each Member, recognizing the existence of different standards in enforcement of IPRs among States.[112]

Specifically, the TRIPS Agreement is limited to the empowerment of judicial or other competent authorities to order certain acts.[113] Therefore, national authorities may order certain procedural remedies, but they are not obliged to do so, and can exercise discretion in applying the mandated rules. There is much more room for maneuver for Members to decide how enforcement ought to be undertaken within their jurisdiction.[114]

Dissatisfaction with the insufficient IPRs protection and domestic enforcement commitments provided in the TRIPS Agreement resulted in the negotiation of the ACTA, which – in turn – has failed.[115] The TRIPS Agreement needs a significant change with respect to its present approach to illicit trade. More needs to be done to prevent the damage that illicit trade and counterfeit goods pose to economic development, States, and consumers themselves.[116]

<Pros>

<Cons>

Imposes obligations on minimum standards of IPRs protection.

Domestic enforcement commitments under the TRIPS Agreement incorporate minimum standards, which – in turn – means weak, broad or diffuse obligations.

 

2.3. Customs Valuation Agreement

 

Illustrative Case: A customs official in Member X’s territory doubts the accuracy of a price described in an invoice. The official can determine the customs value on the basis of a different valuation method, other than the transaction value reflected in the invoice. In this way, the customs authority can apply the actual price of the products, not the fake price in the invoice.

Illicit Trade Covered: Money laundering schemes (under-invoicing).

The GATT and CVA stipulate rules on customs valuation. The GATT states that the customs value of imported goods should be based on the actual value of the goods[117], which is defined as the price at which such goods are sold for sale in the ordinary course of trade under competitive conditions.[118] The CVA provides that the customs value shall be the transaction value, which is the price actually paid or payable for the goods.[119]

If the customs value of the imported goods cannot be determined by transaction value, other methods are to be applied.[120] In Colombia-Ports of entry (DS366), the panel stated that the CVA sets forth the primacy of the use of the transaction value as the customs valuation method, with the others having to be applied sequentially.[121]

The CVA is closely linked to illicit trade, in particular, money laundering which often involves an under-invoicing scheme.[122] The transaction value of the imported goods is normally shown in the invoice. When in doubt as to the truth or accuracy of the price of an invoice, customs authorities will request the importer to provide further information and clarification. If reasonable doubt persists, the customs authorities will not determine the customs value on the basis of the transaction value but will apply a different method of valuation.[123] Therefore, the GATT and CVA can be a legal tool to combat money laundering since customs authorities can apply relevant methods other than the price on the invoice to assess the customs value based on the actual price of the products.

However, in order for customs authorities to apply other relevant methods, States need to have strong and transparent customs authorities in the first place. Because corruption is not entirely uncommon among customs authorities, the effectiveness of this legal tool is questioned. Corruption at the border and at the ports is, undoubtedly, a significant impediment to trade – which results in other serious problems, such as money laundering.[124]

The dangers posed by corruption to the global economy are far greater than the dangers posed by money laundering in some States.[125] Without corrupt customs officials, illegal goods and licit products used for illicit purposes may not stand a chance of crossing across borders.[126] In many States, bribes are frequently offered to customs officials to permit the cross-border movement of smuggled or under-invoiced goods.[127] Since most customs duties are ad valorem,[128] determining the accurate value of imported goods is integral to impose the accurate tariff rates. With an inappropriate customs valuation, higher tariffs that aim to counter illicit trade may not work.

Corrupt customs officials are highly likely to assess the customs value based on the price appearing in the invoice, even in cases where reasonable doubt exists. Corrupt customs authorities evidently do not have a strong will to stop money laundering; indeed, they have been actively participating in illicit trade.[129] This shows the clear linkage between illicit trade and the WTO rules. Illicit trade can adversely impact the functioning of the WTO rules. Even though the CVA has been devised in a way to counter illicit trade, it cannot work properly as originally intended. Illicit trade in developing States is a real issue which should be addressed in the WTO.

<Pros>

<Cons>

ü With various methods of customs valuation, the actual price of imported products can be applied to the cases of under-invoicing.

ü Corruption at border or ports may undermine the CVA.

 

2.4. TBT Agreement

 

Illustrative Case: Member X can adopt a tracking and tracing measure established by the WHO for the purposes of combating illicit trade.

Illicit Trade Covered: Illicit trade on counterfeit goods and excise goods, such as tobacco, alcohol, and petroleum products. 

The TBT Agreement aims at disciplining the increasing use of technical regulations as a non-tariff barrier to international trade. It promotes harmonization of technical regulations by advancing legal advantages to measures which comply with international standards.[130]

A State’s restrictive measure on illicit trade, if and when enacted or adopted pursuant to an international standard, is presumed to be ‘necessary’ under the TBT Agreement, and is likely to be exempted from any violations thereof.[131] The TBT Agreement can be perceived as a safety net for WTO claims on illicit trade at least when the measure is implemented in accordance with international standards.

One example of a potential connection between the TBT Agreement and illicit trade is the “tracking and tracing” measure in global supply-chain security for fighting illicit trade. This is particularly evident in the fight against illicit tobacco trade.[132] In the WHO Protocol, States have agreed to establish a global ‘tracking and tracing’ system to reduce and eradicate illicit trade.[133] Then, can the ‘Tracking and Tracing’ measures be in compliance with the TBT Agreement?

 

 Whether ‘tracking and tracing’ is a technical regulation

The TBT Agreement defines technical regulations as documents that lay down characteristics or their related processes and production methods, which may include terminology, symbols, packaging, marking or labeling requirements as they apply to a product, process or production method.[134]

Therefore, the tracking and tracing measures may be characterized as relevant to markings and labeling; they may be technical regulations for the purposes of the TBT Agreement.

 

Whether the WHO Protocol is an international standard

The TBT Agreement states that technical regulations should not be unnecessary obstacles to international trade, and must not be more trade-restrictive than necessary to fulfill a legitimate objective,[135] which is presumed to be satisfied when technical regulations accord with international standards.[136]

In US-Tuna II (DS381), the Appellate Body stated that an international standard for the TBT Agreement was a standard approved by an international standardizing body which has recognized activities in standardization and whose membership is open to all WTO Members.[137] The WHO, as an international organization whose membership is open to all WTO Members, was considered as an international standardizing body. Most WHO members are also WTO Members.[138]

The WHO Protocol, which relates to the characteristics for products and packaging, marking and labeling, arguably sets a number of standards. Therefore, the WHO Protocol can be considered as an international standard under the TBT Agreement. In conclusion, if the relevant international standard regulates certain types of illicit trade, national measures based on this international standard would be deemed as consistent with the TBT Agreement.

It is worth noting that the applicability of the TBT Agreement to illicit trade in terms of tracking and tracing mechanism is yet to be tested at the DSB. Since there is no relevant case examining the tracking and tracing system, there is little guidance on how to use this system to counter illicit trade.

Considering the growing importance of using tracking and tracing measures in global supply-chain security for curbing illicit trade, the tracking and tracing system should be discussed at the WTO. The relevant Councils or Committees ought to establish guidelines on how to utilize tracking and tracing systems to fight illicit trade. This active involvement of the WTO in the global movement of countering illicit trade would bring a revival to its system.

<Pros>

<Cons>

Promotes harmonization of technical regulations by fostering uniform standards

Without relevant precedent under the WTO, there is no guidance for Members attempting to use this mechanism in a WTO-compatible way.

 

2.5. Trade Facilitation Agreement 

 

Illustrative Case: The customs authority of Member X can cooperate with the customs authorities of other Members and use relevant international standards to improve transparency of border procedures, thus, strengthening the functioning of customs.

Illicit Trade Covered: Illicit trade activities related to corruption at customs.

The TFA seeks to expedite the movement, release and clearance of goods, including goods in transit, and to create a significant boost for the multilateral trading system, as well as for the trade and development communities.[139] The TFA may be relevant to control illicit trade activities related to corruption.[140] Unnecessary trade barriers created by non-transparent, burdensome rules and procedures can constitute vulnerabilities that may create important incentives to engage in corrupt behavior.[141]

Various aspects of the TFA, such as transparency[142], automated entry and payment of duties[143], can serve as powerful measures to address corruption at customs and ports. This type of corruption undoubtedly poses a significant impediment to trade and investment in the developing world. Implementation of the TFA would aid in this effort.[144]

The TFA sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance.[145] It further contains provisions on technical assistance and capacity-building,[146] and establishment of the committee on trade facilitation.[147] These measures will open the door to raise concerns about illicit trade at the WTO. It provides an appropriate forum for Members to consult and cooperate with each other to counter illicit trade under the WTO regime.[148]

The TFA encourages Members to develop or use relevant international standards regarding authorized operator schemes; or import, export, or transit formalities and procedures.[149] Recently, there has been a growing trend among many international organizations to adopt international standards.[150] These relevant provisions under the TFA would facilitate harmonization of international standards, which contributes to consistency of the international trading regime and the predictability and efficiency for Members and traders.

However, there are also limitations, which might undermine the spirit of the TFA. Even though the TFA contains an appropriate legal ground for countering illicit trade, a number of relevant provisions are “best efforts” provisions. They include expressions such as “to the extent practicable”, “to the extent possible”, “wherever practicable”, “as appropriate”, “may”, and “encouraged to”, which do not reflect an imperative lexicon.

In addition, the TFA does not deal with illicit trade directly; rather it provides an opportunity to decrease the levels of corruption by creating a more transparent trade environment for trade. It is, therefore, not a breakthrough to counter illicit trade.

Moreover, the primary purpose of the TFA is to expedite the movement, release and clearance of goods.[151] Therefore, without good governance and strong will and ability to modernize customs processes, the TFA could very well result in increasing or enhancing illicit trade.

The TFA contains various provisions which might be interpreted in a manner that is supportive of the global fight against illicit trade. However, it also has many limitations which can undermine the efficiency of the TFA as a legal tool to counter illicit trade. Therefore, Members should cooperate with each other to make the best use of the newly-entered-into-force TFA. Otherwise, like the CVA, this legal tool would not work properly. With a number of ‘best efforts’ provisions in the TFA, illicit trade in developing Members might increase. This illustrates the real relationship between the WTO rules and illicit trade. Therefore, the illicit trade issue should be the main agenda for the Committee on Trade Facilitation in the nearest future in order for the TFA to function properly.

<Pros>

<Cons>

It is a novel legal tool vis-à-viscorruption at customs and ports. It aims at decreasing illicit trade.

It enhances cooperation between customs and other authorities, which results in more transparency.

It contains several “best efforts” provisions, which lack strong obligations

It lacks a direct relation to illicit trade.

Without good governance, it may result in an increase of illicit trade as it aims at expediting all trade. 

 

2.6. GSP

 

Illustrative Case: Member X (a developed State) can offer non-reciprocal preferential treatment to selected products originating from designated Developing Members in order to combat drug production and trafficking.

Illicit Trade Covered: Any kinds of illicit trade.

 Under the Enabling Clause[152], developed Members can provide differential and more favorable treatment to developing Members under their GSP schemes.[153] It is the preference-giving State that unilaterally decides the products and Members to be included in its GSP scheme.[154]

GSP is a mechanism by which States may choose to fight a global threat of illicit trade. States have been offered GSP benefits on a conditional basis. Under the EC’s former GSP program,[155] GSP benefits may be suspended from a State that fails to combat drug production and trafficking.[156] Money laundering and corruption may also result in withdrawal of preferences.[157]

In EC-Tariff Preferences (DS246), the Appellate Body stated that a developed Member may grant special GSP to certain developing Members, as long as it is available to all similarly situated developing Members.[158] Similarly situated developing Members are those that have the development, financial and trade needs to which special GSP is intended to respond.[159] It emphasized that the actions of a preference-granting State must be taken with a view to improving the development, financial or trade situation of a beneficiary State. Thus, a sufficient nexus should exist between special GSP and the likelihood of alleviating the relevant development, financial or trade need, in our case, the problem of illicit trade.

In the Appellate Body’s reasoning, the focus should be on the question of benefits: whether they are available to all similarly-situated developing States, based on objective criteria. In EC-Tariff Preferences (DS246), the Appellate Body found that the Drug Arrangements provided for a closed list of few beneficiaries and contained no criteria or standards to provide a basis for distinguishing developing Members. It, hence, concluded that the EC failed to demonstrate that the Drug Arrangements were justified under paragraph 2(a) of the Enabling Clause.[160]

Based on this decision, the possibility of imposing conditions on the additional preferential tariff treatment that are unrelated to a beneficiary State’s development, financial or trade needs (such as a fight against illicit trade), is less clear, although it could be argued that elimination eventually serves a beneficiary State.[161] The Appellate Body did not explicitly state a conclusion as to whether benefits for States experiencing problems with drug production and trafficking related to the “development, financial and trade needs”.[162] This issue needs further clarification in future cases.[163]

Special GSP should be provided to certain developing States to counter illicit trade. Since GSP is closely related to economic incentives, it can be a strong financial inducement to developing States to fight illicit trade. Illicit trade and the development of developing States are closely linked.[164] Illicit trade has had an adverse direct impact on economic growth in developing States, which is related to the “development, financial and trade needs” in developing world. Therefore, this special GSP should be permitted at the DSB so that developed Members could actively use the GSP system in order to counter illicit trade in developing States. 

<Pros>

<Cons>

GSP can link financial benefits and illicit trade. It is a strong tool to compel developing States.

Developing States do not have GSP.

Linkage between special GSP and illicit trade has not been formally confirmed. 

 

2.7. Government Procurement Agreement

 

Illustrative Case: A company of “State A” engages in illicit activities outside “State A”, while attempting to take part in State’s B government procurement processes.

Illicit Trade covered: any illicit trade related to government procurement.

As a recently-revised plurilateral agreement, the GPA is nowadays attracting a few more WTO members. The question that remains unanswered is whether this agreement could potentially aid in tackling certain kinds of illicit trade. The GPA generally obliges States Parties to open their government procurement sector as much as possible.[165]

Because the Agreement emphasizes more on sector-liberalization (as opposed to effective and direct regulation of illicit practices and conducts in government procurement), it does not provide many legal tools to combat illicit trade, unless fraudulent actors engage in tender. Article VIII of the GPA enables States to impose conditions such as “legal and financial capacities”, which include involvement in serious crime, tax evasion and/or professional misconduct.[166] It is worth noting that the preamble of this Agreement expressly mentions the importance of external (non-WTO) treaties vis-à-vis its subject matter (for example, the United Nations Convention Against Corruption).[167] 

<Pros>

<Cons>

ü Enables and empowers States to require the rendering of more information on the activities of foreign companies vis-à-vis the government procurement sector.

ü It is limited to the government procurement sector.

ü It is a Plurilateral Agreement, applicable between a very small number of WTO Members.

 

2.8. Findings

 

The analysis of the above-referred WTO tools evidences that there are some legal mechanisms allowing to fight against illicit trade, albeit not exempt from considerable limitations that naturally impact likelihood of success.

With its strong and binding enforcement mechanisms, the WTO should undertake an active role in combating illicit trade when dealing with relevant cases regarding this global threat. Other international organizations have long undertaken significant actions to address this problem. Nonetheless, as it is evidenced by now, these efforts have not been enough. The WTO cannot be the bystander of this global trend.

A change is much needed in the WTO. Only with this paradigm shift can the “home” of the international trade system truly foster its very object and purpose.

 

3.   The WTO as the “Standard-Bearer” of the International Trade System: Why is the WTO the most appropriate international organization to deal with illicit trade 

 

It is no secret that the WTO has a strong enforcement-mechanism. Other treaties and international instruments addressing illicit trade lack this kind of strong enforcement provisions. The WTO, as the “house of international trade”, is the right forum to settle trade cases. Resorting to the adoption of national laws (although not preempted or opposed by this Memorandum) could take too long, while the regulation of this major threat requires more immediate objective action.

All of the “external” treaties and other international instruments referred to in this Memorandum have one thing in common: they are global conducts arising out of (non-licit) worldwide trade relations. The WTO, hence, should take the lead in this subject matter – particularly, because no other international organization fulfills the required criteria. Such criteria refers to three cumulative requirements:

  • That it is an Inter-State international organization (as opposed to an inter-governmental organization)[168].

  • That it is an international organization of global (“universal”) character open to all States of the world.

  • That it is an international organization materially tasked with the regulation of global (non-regional) trade relations.

Both the WCO and INTERPOL would fail to meet the first requirement as they are inter-governmental organizations (composed by customs authorities and police authorities, respectively, but not by the States in toto as original subjects of international law). The OECD would, in turn, fail to meet the second criteria, as OECD membership requires certain economic and other criteria to join the organization, which would automatically exclude the least-developed WTO Member States. 

 

4.   The Memorandum’s Proposal: Building Comprehensive Strategies

 

Section 2 above has examined the relevant legal framework and has reached an inevitable conclusion: the current WTO law in force is not only insufficient to fight against illicit trade, but – under certain circumstances – it may even facilitate or foster practices and/or conducts associated with illicit trade.[169]

This lack of direct regulation of the problems associated with this global threat (at no other place than the “house of international trade”) requires actions from both the WTO itself and its Member States.

The WTO has a choice: it can deal with illicit trade, by means of adopting a comprehensive international instrument that directly regulates the subject-matter (after all the WTO is the “house of international trade” and, hence, the most appropriate international forum to address the issue) or it can allow Member States to exclude such fraudulent and non-licit practices and conducts from their obligations and commitments.

What the WTO cannot do, however, is continuing to ignore the gravity of this global threat and its “clear and present” nature in today’s world.

Member States, in turn, cannot remain passive; actions on their part ought to be adopted in order to effectively fight against illicit trade. This means building comprehensive strategies through the assessment of legal alternatives or options to combat illicit trade.

That list of options or “menu of alternatives” is – evidently – intertwined with the question on what is the WTO actually going to do. Would it adopt a comprehensive international instrument to directly regulate illicit trade (“Scenario A”)? Is that option actually viable?

The negotiation, signature and entry into force of a new WTO treaty on illicit trade can take considerable time, requiring Members to compromise, making ample concessions. Yet if that course of action is deemed as politically plausible (which is a matter that is outside the scope of this legal memorandum), one way to get the process going might be to discuss and adopt a working definition of “illicit trade”. To that end, Subsection 3.1. below will suggest a comprehensive definition of “illicit trade” for specific use at the WTO.

If, on the contrary, the political feasibility study determines that a more appropriate course of action would be to move for a “redesign” of WTO rules (in order to expressly allow Member States to exclude illicit trade from their obligations and commitments), the strategy may include the use of (a) formal legal mechanisms and (b) other flexible or non-legal (“informal”) tools (“Scenario B”).

Under (a) are to be found: (i) an authoritative interpretation of the Marrakesh Agreement establishing the World Trade Organization, in which the terms “trade relations” are to be constructed vis-à-vis the notion of “illicit trade” with the objective of excluding the latter (Subsection 3.2.1 below); and (ii) a waiver from obligations and commitments arising out or in connection with WTO treaties in force when Members are attempting to fight against illicit trade (Subsection 3.2.2 below).

Regarding (b), in Section 3.3. below are to be referred: (i) the organization (for a second time) of a session at the WTO’s public forum or a joint symposium with regard to illicit trade; (ii) the submission of proposals to counter the global threat at the General Council and specific councils; and (iii) the issuance of a World Trade Report and/or a joint study on the subject matter.

 

4.1. Comprehensive Definition of Illicit Trade (Scenario A) 

 

For the purposes of discussing the topic in the WTO, the following working definition of illicit trade may be adopted:

“Illicit trade means any commercial practice or transaction related to the production, acquisition, sale, purchase, shipment, movement, transfer, receipt, possession or distribution of:

(i) any illicit product defined as such by international law; or

(ii) any licit product for non-licit purposes as defined by international law[170]

Illicit trade also covers any conduct intended to facilitate such activities.”

This definition intends to fill the clear and present gap at the WTO: products that are used in the ordinary course of trade for non-licit purposes cannot continue to be protected under the rules of licit and fair trade. The wording “as defined by international law” intends to ensure that the determination of “what” is a type (ii) product is not left to one State’s (“arbitrary”) view, but rather defined as such by either (a) conventional law or (b) customary international law.

This working definition would, hence, allow States to adopt necessary measures to fight against this global threat,[171] by means of preempting the application of WTO rules on licit and fair trade to illicit and unfair trade.

The word “Working” in “Working Definition”: The interchangeable nature of the terms “International Law”

As mentioned, the terms “international law”, to which the above-presented working definition allude, include applicable conventional law in force as well as customary international law. As it is the case with any working definition, these terms can be changed to better reflect States’ will.[172] By way of example, the words “international law” may be substituted by the terms “international instruments widely accepted by States Parties” or “applicable international instruments whose observance is open to all WTO Members”.

Political decisions may prompt WTO Members to limit the terms “international law” to, for example, only global conventions (like the WHO FCTC, UNTOC Convention, Financing of Terrorism Convention, Trade in Arms Convention or CITES). WTO members can also expand the scope of the definition by changing the word (international) “law” to (international) “standards”. They can, of course, also specify the particular international organizations which have, in their collective view, the capacity to create these standards. In the SPS Agreement, for instance, the guidelines from the Codex Alimentarius Commission or the International Office of Epizootics were deemed as international organizations that enjoyed such capacity.[173] The same should occur vis-à-vis illicit trade.

This decision (what to include or not include vis-à-vis the use of the terms “international law”) is outside the scope of this Memorandum, as a matter of political assessment. However, what is important to keep in mind is that those terms can be changed to be “narrower” or “broader” in scope (in function of the will of States), as long as the “objective standard”[174] is kept.

External International Law as an “objective standard” recognized by the WTO: the ‘precedent’ of the TRIPS Agreement

The process of negotiation and adoption of the TRIPS Agreement serves as an important precedent regarding the recognition of external international regulations into the international the WTO (while also creating a forum for dispute settlement and enforcement).

Section 1 on Part II of the TRIPS Agreement, for instance, acknowledges and ratifies the recognition of the rights provided for in the Berne Convention, a treaty adopted within the realm of another international organization.[175]

On subsequent sections, the TRIPS Agreement also enlightens the application of “Undisclosed information”, “Geographical Indication”, and “Trademark rights” as established in the Paris Convention (another treaty adopted within the realm of WIPO and not the WTO).[176]

Furthermore, the TRIPS Agreement also created enforcement mechanisms for the WTO-externally recognized rights, thus, unifying the regulations relating to IP Rights.[177]

 

4.2. Formal Tools (Scenario B) 

 

4.2.1. Authoritative Interpretation
 

The Ministerial Conference and the General Council have the exclusive authority to adopt interpretations (entailing erga omnes effects) of the WTO treaties.[178]

Authoritative Interpretations of the Marrakesh Agreement establishing the World Trade Organization may be, in particular, a relevant tool in the fight against illicit trade. Concretely, the terms “trade relations” enshrined in the above-mentioned treaty are to be constructed vis-à-vis the notion of “illicit trade”, with the objective of excluding the latter from WTO obligations and commitments.

One may be inclined to ask what is the difference between an authoritative interpretation and an interpretation in the DSB. According to WTO case law,[179] DSB interpretations are only binding on the disputants and applicable to the specific subject-matter of the dispute; whereas authoritative interpretations by the Ministerial Conference and the General Council are binding on all Members and on all subsequent dispute cases. Thus, an authoritative interpretation – specifically aiming at carving out illicit trade from WTO obligations and commitments arising out of WTO treaties in force – provides an available legal tool to counter this global threat.

In practice, however, Members have historically been incapable of adopting such authoritative interpretations due to the fact that the decision to adopt an authoritative interpretation requires a vote by a three-quarter majority of the Member States.[180]

For a State who wishes to tackle illicit trade, the authoritative interpretation may be deemed as the “last resort” in the wake of DSB rulings that have been reluctant to carve out illicit trade from the WTO obligations and commitments.

Since the exceptions clauses have not been successful to defend Members’ legitimate policies in the fight against illicit trade – the “adjudication road” has not worked well for that goal –, the “legislative road” (Ministerial Conference and General Council) may pave the way in order to counter illicit trade.    

So what should the relevant part of an “authoritative interpretation” on illicit trade contain? The next subsection presents, for illustrative purposes, a possible answer to this question.

Concrete Interpretation of the Marrakesh Agreement establishing the World Trade Organization

Preliminary Clarification

The Marrakesh Agreement establishing the World Trade Organization is the constitutive treaty of the WTO. This international instrument (or an authoritative interpretation thereof) may offer a truly comprehensive tool to fight against illicit trade, in a way that (an authoritative interpretation of) the GATT simply cannot offer. The latter treaty is restricted to trade of goods and, hence, its scope would exclude, inter alia, illicit trade in services. An authoritative interpretation of the Marrakesh Agreement establishing the World Trade Organization would cover all kinds of trade, including – of course – services.

****

An authoritative interpretation must, first, determine the relevant clause to be constructed. In this case, the key provision is Article II(1) of the Marrakesh Agreement establishing the World Trade Organization. The clause reads as follows:

“1.   The WTO shall provide the common institutional framework for the conduct of trade relations among its Members in matters related to the agreements and associated legal instruments included in the Annexes to this Agreement. (emphasis added).”

Secondly, the relevant terms that ought to be interpreted need to be identified. The words “trade relations” are the relevant terms. On this point, it is worth noting that the terms “trade relations” are used throughout the Marrakesh Agreement establishing the World Trade Organization. In like manner, the GATT uses the terms “commerce” or “commercial transaction”[181] to refer to the concept of “trade” in goods.

Thirdly, the applicable framework to the construction of conventional clauses must be set forth. In this regard and as commentators note, WTO treaties are not isolated from the general customary law of treaties.[182] Rules on treaty interpretation at the WTO are governed by Article 31, Vienna Convention on the Law of Treaties (‘VCLT’). This is, hence, the relevant framework.

Article 31 states that the correct interpretation of a treaty resorts to the ordinary meaning of the terms employed, read in their context and in the light of its object and purpose.[183] Therefore, Article 31 – as the relevant framework identified – must be applied to the circumstances under examination.

Regarding the ordinary meaning of the terms employed, the Black’s Law Dictionary defines “commerce” as: “The exchange of goods and services, esp. on a large scale involving transportation between cities, states, and nations.”[184] Relations or relationship is, in turn, defined as “the nature of the association between two or more people; esp., a legally recognized association that makes a difference in the participants' legal rights and duties of care”.[185]

In order to consider the “context” in which the Treaty was adopted, any authoritative interpretation of the words “trade relations” vis-à-vis illicit trade necessarily requires consistency with preexisting WTO conventional law. This is especially true because potential amendments to WTO treaties are not in question and so coherence with prior treaties is essential. In concrete terms, the Treaty was adopted in the context of fostering “trade liberalization”, with tariff barriers being the main concern.[186]

As to the object and purpose of the Marrakesh Agreement establishing the World Trade Organization, its preamble provides that the WTO was created as a recognition of the “need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth of international trade commensurate with the needs of their economic development.”[187] In turn, the GATT preamble evidences a collective aim to use trade and economic relations as a way to raise standards of living, developing the full use of the resources of the world.[188]

Finally and as a consequence of the above, the content of the actual text of the authoritative interpretation needs to be suggested. In light of (a) the ordinary meaning of the terms “trade relations” and “commerce” (or even “commercial transactions”); as well as considering both (b) its object and purpose and (c) the relevant context in which it was adopted, the terms are to be constructed as follows:

“The terms “trade relations” under this Article [Article II] shall be circumscribed to ordinary activities of production, modification, shipment, receipt, possession, distribution, sale or purchase of exchanged goods, that provide a lawful contribution to the development of the State Party in accordance with international law.”

The phrase “that provide a lawful contribution to development of the State involved” is aimed at addressing a wide range of illicit trade practices, all of which fail to contribute “lawfully” to a State’s economy. Criminal organizations operate their trade-abusing schemes by circumventing legal obligations which are sources of legal income for the State concerned.

This reference (“lawful contribution to development of the State involved”) may, at first sight, appear as too broad. Investor-State Arbitral Tribunals have set aside a similar wording employed in BITs for being – in their view – “too subjective”. Other Investor-State Arbitral Tribunals have not been of that opinion.

Such reference – it is submitted – should be included. The task of suggesting the eventual text of an “authoritative interpretation” is a duty that assimilates to that of drafting a treaty clause. States, in their processes of drafting BITs, have determined that the wording: “lawful contribution to development of the State involved” is important for them to achieve the goals (object and purpose) of the treaty. Hence, to date, they have continued to include that wording in their treaties.

The fact that some (but not all) Investor-State Arbitral Tribunals have set aside such wording should, thus, have no impact in the task of suggesting a text of an eventual authoritative interpretation (a process that relates to the stage “drafting” and not to the eventual subsequent stage of “adjudication”). If anything States should emphasize the need for Arbitrators to consider such wording, by means of including relevant text.

****

Similarly and because there is always a possibility that a given State may enter into an agreement for the purposes of circumventing concessions under the WTO, the scope of “commerce” hereby proposed attempts to exclude trade that is not in accordance with international law. Thus, the sentence “lawful contribution […] in accordance with international law” should leave no doubt as to its exclusion of domestic law: it has no commas and solely refers to “international law”.

****

The realm of International Investment Law – as a closely related area to International Trade Law – deserves one additional mention. BITs have expressed that for an “Investment” to be protected under the relevant conventional law, it must be “lawful” or “in accordance with the concerned State’s domestic law”. Investor-State Arbitral Tribunals have upheld this view.[189]

This Memorandum’s proposal attempts, however, to be less restrictive. It intends to protect States from “commerce” not made in in accordance with wider (non-WTO) international law, as opposed to the more restrictive threshold of “domestic law”. As the latter has often been perceived as “arbitrary” in the realm of international trade law (even though not so in the realm of international investment law), the reference to “international law” should be more likely to be accepted by key stakeholders in international trade law.

 

4.2.2. Waiver
 

Each Member shall ensure the conformity of its domestic laws and regulations vis-à-visits WTO obligations. However, in exceptional circumstances, when a Member is troubled to meet an obligation, it can request a waiver from obligations and commitments arising out or in connection with WTO treaties in force.[190]

Aiming at combating illicit trade, waivers may be another viable option for States to consider. They are provided for in the legal framework of the WTO and, hence, States should seriously evaluate them as a viable tool that does not necessarily send a “protectionist message”. In 2015, eight waivers were granted, but by 2015 only twelve other waivers had already been granted. The following chart illustrates this:

WAIVER

DECISION

DATE OF ADOPTION

DATE OF EXPIRATION

Granted in 2015[191]

Implementation of Preferential Treatment in favor of Service and Service Supplier of LDCs and Increasing Participation in Services Trade[192]

WT/L/982

WT/MIN(15)/48

19 Dec. 2015

(Ministerial

Conference)

31 Dec. 2030[193]

Introduction of Harmonized System 2002 Change into WTO Schedule of Tariff Concession[194]

WT/L/967

30 Nov. 2015

31 Dec. 2016

Introduction of Harmonized System 2007 Changes into WTO Schedules of Tariff Concessions[195]

WT/L/968

30 Nov. 2015

31 Dec. 2016

Introduction of Harmonized System 2012 Changes into WTO Schedules of Tariff Concessions[196]

WT/L/969

30 Nov. 2015

31 Dec. 2016

LDCs – Obligations under Article 70.8 and Article 70.9 of the TRIPS Agreement with respect to Pharmaceutical Products

WT/L/971

30 Nov. 2015

1 Jan. 2033

U.S. – African Growth and Opportunity Act

WT/L/970

30 Nov. 2015

30 Sep. 2025

Canada- CARIBCAN

WT/L/958

28 July 2015

31 Dec. 2023

U.S. – Caribbean Basin Economic Recovery Act

WT/L/950

5 May 2015

31 Dec. 2015

Waivers in effect by 2015

Philippines – Special Treatment for Rice of the Philippines

WT/L/932

24 July 2014

30 June 2017

Kimberley Process Certification Scheme for Rough Diamonds - Extension of Waiver[197]

WT/L/876

11 Dec. 2012

31 Dec. 2018

Preferential Treatment to Services and Service Suppliers of LDCs[198]

WT/L/847

17 Dec.2011 (Ministerial Conference)

15 years from its adoption[199]

Developing Country Members – Preferential Treatment for LDCs

WT/L/759

27 May 2009

30 June 2019

Regarding illicit trade, in particular, the Kimberley Process Certification Scheme (Kimberley Scheme) is the only waiver in force. It is part of the follow-up of the UN determination on the trade of conflict diamonds, in particular, the Security Council Resolution on embargoes on diamond importation from Angola and Sierra Leone,[200]and the General Assembly Resolution calling on members to devise measure to address the trade of conflict diamonds.[201]

This scheme, however, is non-binding. It requires participants to ensure that only rough diamonds certified under the scheme are imported and exported. Participants are further asked to refrain from importing and exporting rough diamonds to/from non-participants. States that fail to implement the minimum requirements can be considered as non-participants, hence, excluded from the market. Given the potential trade-distortive effects of the requirements, many participants were concerned that they would violate WTO obligations. Therefore, participants requested this waiver, which effectively assured that participants would not face WTO-inconsistency claims brought by non-participants.[202]

The waiver had a significant positive impact in the fight against illicit trade. Beyond this, it illustrates how Members may proactively ensure that their measures are not challenged at the WTO (without resorting to the general exceptions under GATT). Both the scheme and the waiver provide potentially successful mechanisms to further combat illicit trade.

The WTO Agreement imposes strict conditions on waivers. They are granted on an exceptional basis and a State is required to demonstrate exceptional circumstancesjustifying its adoption. Moreover, waivers are approved by three-quarters majority of the Members. Lastly, when granted for more than one year, waivers are subject to an annual review to assess whether the exceptional basis is still clear and present. The threats associated with, inter alia, money laundering in certain States are – undoubtedly – exceptional.

So what should a Draft Waiver Request contain? The next subsection presents, for illustrative purposes, a possible answer to this question.

Concrete Waiver Request 

A Member State’s request to waive obligations and commitments arising out of or in connection with WTO treaties in force (when attempting to fight against illicit trade), must contain specific items. Perhaps the most important item is a thorough description and/or a (preferably, independent) study of the exceptional circumstances faced by that Member State. Naturally, this is not the only aspect.

The following Section presents what a (Draft) Waiver Decision on Illicit Trade would like (if adopted by the General Council).[203] The preambulatory phrases of such Draft Decision elucidate on some of the main items that are required to be conveyed to the WTO.

The operative part, in turn, reflects what a Member State would – theoretically – be allowed to do when its Waiver Request is approved and granted.

 

                                                 Draft Waiver Decision                   

 

The General Council,

Having regard to the Guiding Principles to be followed in considering applications for waivers adopted on 1 November 1956 (BISD 5S/25), the Understanding in Respect of Waivers of Obligations under the General Agreement on Tariffs and Trade 1994, and paragraphs 3 and 4 of Article IX of the Marrakesh Agreement Establishing the World Trade Organization (hereinafter "WTO Agreement");

Conducting the function of the Ministerial Conference in the interval between meetings pursuant to paragraph 2 of Article IV of the WTO Agreement;

Taking note of the request of the Members listed in the Annex for a waiver from Article II:1(a) and (b) GATT 1994 with respect to their domestic measures to fight against the international trade of licit products for non-licit purposes as defined by the relevant international instruments referred to therein;

Noting the economic studies conducted by, inter alia, the Organisation for Economic Co-operation and Development, the Inter-American Development Bank and other intergovernmental institutions, with regard to the extraordinary impact of illicit trade in many WTO Members’ economies; 

Recognizing that the trade of licit products for non-licit purposes is a matter of serious international concern, which can be directly linked to the fueling of terrorism, transnational criminal activities and armed conflict, amongst other serious cross-border threats;

Recognizing the extraordinary nature of this issue and the devastating impact of illicit trade in the global financial and domestic taxation systems; as well as with regard to the funding of local social programs and public policies;

Noting the relevant treaties and other international instruments adopted at international organizations whose membership is open to all WTO Members aiming at addressing the issue of illicit trade;

Further recognizing the interests of all WTO Members in legitimate and fair trade; 

Considering that, in light of the foregoing, exceptional circumstances exist justifying a waiver from Article II, Paragraph 1 (a) and (b) of the GATT 1994 with respect to the trade of licit products for non-licit purposes;

Decides as follows:

  1. With respect to the measures taken by a Member listed in Annex 1 necessary to prohibit the import of licit products for non-licit purposes as defined by the international instruments referred to in Annex 2, Article II, Paragraph 1 (a) and (b) of the GATT 1994 is waived as of [insert date] until [insert date].

  1. This waiver also applies in respect of measures taken by a Member not listed in Annex 1 that desires to be covered by the present waiver and that notifies the Council for Trade in [insert Council] accordingly.

  1. Members benefiting from this waiver should notify their measures necessary to prohibit the import of licit products for non-licit purposes as defined by the international instruments referred to in Annex 2, to the Council for Trade in [insert Council].

  2. Members benefiting from this waiver, upon request, shall examine the possibility of entering into consultations with any interested Member with respect to any difficulty or matter that may arise as a result of the implementation of the measures regulating the import of licit products for non-licit purposes covered by this waiver.

  1. Any Member that considers that measures regulating the import of licit products for non-licit purposes covered by this waiver are being applied inconsistently with this waiver; or that any benefit accruing to it under the GATT 1994 may be or is being impaired unduly; and that considers that consultations have proved unsatisfactory, may bring the matter before the General Council, which will examine it promptly and will formulate any recommendations that it judges appropriate. 

ANNEX 1

[insert Members]

ANNEX 2

[insert treaties and/or international instruments].

 

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As mentioned, the comprehensive “menu of alternatives” that is available to States to fight against illicit trade also encompasses flexible or non-legal tools. This “Informal tools” are addressed in detail below. 

 

4.3. Informal Tools

 

4.3.1. Flexible Tools to raise awareness with other Member States
 

Public Forum

It is the WTO’s major annual outreach event, which has attracted 1,300 participants from 85 States in 2015 alone. A State can organize, for a second time, an “illicit trade and the WTO session” with NGOs, academia, international organizations or other WTO members. Raising global awareness of illicit trade requires (constantly) bringing the issue into the attention of other Member States: doing it once may not be enough to insert the matter into the agenda.

General Council and Specific Council Proposals

At the meetings of those organs, a State can submit its proposals on illicit trade (along with other co-sponsors) to undertake actions to counter illicit trade. In terms of the General Council, the State can present “broad issues of illicit trade” and its “overall impact on global trade”. In terms of the Specific Councils (such as the Council for Trade in Goods, the Council for TRIPS and the Council for Trade in Services) a State can devise a specific proposal which deals with certain types of illicit trade and its impact on the concrete areas of its economy. A State that is, for instance, interested in money laundering, may convey its proposal to the Council for Trade in Goods. However, in order to fully raise awareness, it would be desirable to resort to all councils.

 

4.3.2. Flexible Tools to raise awareness with the WTO

World Trade Report[204]

As “the” research and analysis paper of a major topic, the World Trade Report aims to deepen the understanding on trends in trade, trade policy issues and the multilateral trading system. Previous topics were: Leveling the trading fields for SME (2016), Trade and Development (2014), and Factors shaping the future of world trade (2013). In this sense, “Illicit Trade in a Globalizing World” may very well be an appropriate topic for the report.

 

Joint Symposium (with other international organizations)

The WTO regularly convenes the WHO-WIPO-WTO joint symposiums in order to exchange views on trade and another subject matter. Because Illicit trade has been addressed at other international organizations, a joint meeting with them may be integral to share a view on how to collectively counter illicit trade. This could present an opportunity for the Secretariat to take the lead to tackle this issue and show that they are concerned about this global threat.

Joint Study and Publication (with other international organizations) 

The WTO, occasionally, conducts joint studies about relevant matters with other international organizations, publishing results. By way of example, in 2002, the WHO and the WTO conducted a joint study on the relationship between trade rules and public health. Moreover, in 2015, the WTO published the joint paper with WIPO and WHO, titled ‘Promoting Access to Medical Technologies and Innovation’, which looks at the intersections between public health, IP and trade. In this sense, the joint study / joint paper can describe how WTO agreements relate to different aspect of illicit trade, which will raise much more global awareness of the illicit trade.

 

4.4. The Next Step: Establishing the Agenda

After raising global awareness with like-minded States, the WTO and other relevant international organizations, a State should undertake significant efforts to make sure illicit trade is – from that moment on – present in the WTO agenda. Some of the upcoming opportunities to raise the issue are:

 

Ministerial Conference

In 2017, the 11th Ministerial Conference will take place from 11 to 14 December in Argentina.

 

Ministerial Declaration

At the end of the Ministerial Conference, a Ministerial Declaration is issued. Inserting illicit trade into a Section, a paragraph, or even a sentence of the Ministerial Declaration should be the first step.

If there is a consensus on the importance of illicit trade, the WTO Members can adopt the separate Ministerial Declarations on the issue of “illicit trade and WTO”.

States may also avail themselves of the opportunity and request an authoritative interpretation or a waiver during the Ministerial Conference.

 

General Council or Specific Council

During the General Council meeting, the State may also request an authoritative interpretation or a waiver. Addressing certain types of illicit trade can be determined and inserted into the agenda of a specific council.

 

5.   Final Remarks

 

Illicit trade activities have, undoubtedly, become a worldwide phenomenon. These activities are not only harmful to the States’ economy but also defeat the object and purpose of the international trade law system. To address this issue, the international society has taken partial steps, regulating (some of the) conducts in a fragmented way.

Complete absence of comprehensive definitions continues to bar progress. Fragmented international instruments also pose problems on enforcement and settlement of disputes. Cooperation among States is crucial, albeit not the exclusive solution.

The WTO, as the “standard bearer” and “home” of the international trade system, needs to undertake substantive actions. To date it is, strangely, an international (trade) organization which has no substantive international illicit trade instruments. These actions, of course, are not inevitably confined to what is presented in this Memorandum. However, the analysis that is hereby submitted (on the available WTO tools, as well as on the potential “formal” and “informal” strategies to adopt) shows that this international organization needs more actions to effectively address the issue.

 

 

 References: 

[1] Non-illicit products used in the ordinary course of trade for non-licit purposes, as defined by international law, include, but are not limited to, goods traded outside the financial system or transactions of goods traded within the financial system, but permitting the transfer of wealth for illegal purposes.

[2] OECD, 2016, Illicit Trade: Converging Criminal Network, OECD Reviews of Risk Management Policies,