Branded Story / TRACIT

Authored by: Louis Bonnier

Illicit trade is a major and growing policy challenge worldwide. From smuggling, counterfeiting and tax evasion, to the illegal sale or possession of goods, services, humans and wildlife, governments are losing billions in tax revenues, legitimate businesses are undermined, and consumers are exposed to poorly made and unregulated products.

The World Economic Forum estimated the value of illicit trade and transnational criminal activities at 8% to 15% of global GDP in 2014.¹ With estimations of various illicit activities running upward of $3 trillion; these figures rival the GDP of some G7 countries.²

Illicit trade has a particularly debilitating effect on legitimate business, in terms of lost market share, slower growth, damage to business infrastructure, reputational harm and rising supply chain compliance, security and insurance costs.

For governments, illicit trade has an extensive destabilizing impact on global security due to its central role in facilitating transnational organized crime and illegal flows of money, people and products across borders. This in turn undermines the rule of law, giving rise to a hostile business environment that discourages investment.

In addition to distorting markets and draining public revenues, illicit trade undermines society’s efforts to achieve the United Nations’ Sustainable Development Goals (SDGs) with negative impacts on consumers, workers and the environment.

The world needs sustained G7 stewardship
Representing the world’s seven most industrialized economies, the G7 has shown leadership in curbing several illicit trade issues. At the 2006 St. Petersburg Summit, Leaders agreed to strengthen individual and collective efforts to combat piracy and counterfeiting,³ and six years later at Camp David they underscored the role that high standards for Intellectual Property Protection (IPR) and enforcement have in combatting illicit trade in pharmaceuticals.⁴ At their 2013 Lough Erne Summit, Leaders affirmed commitments against the illicit trade in endangered wildlife species, corruption, transnational organized crime and human trafficking.⁵ They also expressed their commitment to support responsible, conflict-free sourcing of minerals and precious stones. The 2015 Lübeck Foreign Ministers’ Statement on Maritime Security,⁶ and the subsequent 2016 Hiroshima Statement,⁷ also saw the G7 pledge to step up efforts to prevent illegal, unreported and unregulated (IUU) fishing. And at the 2016 Ise-Shima Summit, Leaders pledged to tackle illegal logging⁸.

These initial steps and commitments address significant areas of illicit trade and admirably demonstrate the clout of G7 Leaders to address major, cross-border socio-economic challenges.

Nonetheless, there is a pressing need for sustained G7 leadership to address the persistent and multiplying threat of illicit trade to economic growth and prosperity. While globalization has brought with it many benefits, the massive volumes of international trade and the proliferation of supply chain nodes have increased complexities and vulnerabilities to the benefit of transnational organized crime.

Here are some astonishing facts:
■ According to the OECD, international trade in counterfeit and pirated goods has grown from $250 billion annually in 2008, to more than $461 billion in 2013, an increase of more than 80% in less than 5 years. Counterfeit goods now represent more than 2.5% of world trade – including 5% of all imports into the European Union.⁹
■ The growth of illicit digital trade of copyrighted works – not included in the OECD figure – constitutes a significant portion of the value of global illicit trade.10 The value of digital piracy in music, movies and software in 2015 alone was estimated to more than $200 Billion.¹¹
■ After years of decline, illegal logging is on the rise again.¹²
■ Incidents of human trafficking in U.S. rose by 36% in 2016¹³, with an estimated 25 million people globally trapped in forced labor according to the International Labor Organization (ILO) and the Walk Free Foundation.¹⁴
■ It is estimated that $133 billion of oil and fuels are illegally stolen, adulterated, or defrauded from legitimate petroleum companies every year¹⁵, with equally significant losses to governments through subsidy abuse and tax evasion¹⁶.
■ The global illicit trade in tobacco has grown to more than $35 billion annually,¹⁷ causing substantial tax losses and providing a major source of financing for organized crime.¹⁸
■ Food fraud in the form of Economically-Motivated Adulteration (EMA) robs the global food industry of an estimated $30-40 billion each year, undermining economic growth and costing jobs, with potentially disastrous effects on the health and well-being of consumers.¹⁹
■ The spread of ineffective, illegal pesticides further compounds risks to sustainable food systems. And the introduction of mislabeled, unregulated, and unidentified substances and chemicals poses risks to workers, consumers, animal consumption and broader ecosystems.

Meanwhile, the world faces new threats and new actors, including cybercrimes, violent extremism and the exploitation and misuse of digital marketplaces and social media networks.

Illicit trade undermines sustainable development
Illicit trade – in all its forms – undermines the collective effort to achieve the UN SDGs and stands in direct juxtaposition to the 2030 Agenda for Sustainable Development. In some cases, illicit trade undermines achievement of the macro-economic and societal goals. For instance, the crowding-out effect of illicit trade drains revenue and growth potential from the legal economy and robs governments of taxable income that can be used for development (SDG 1 & SDG 8). Illicit trading provides a substantial portion of the incomes of organized criminals and terrorists groups (SDG 16). All forms of illicit trade rape natural resources (SDG 14 & 15) and ultimately dupe consumers or unknowing intermediaries into false purchases (SDG 12). In other cases, illicit trade acutely undermines the achievement of specific SDGs. IUU fishing depletes coastal regions’ food supply (SDG 2) and prevents the sustainable management and protection of oceans (SDG 14); illicit trade in pharmaceuticals threatens the health and safety of consumers (SDG 3); and the presence of human trafficking and forced labor in global supply chains strikes at the core of human decency and our shared moral values (SDG 8).

Given the G7’s recurring commitment to the 2030 Agenda, these threats compel the G7 to amplify its attention to the problem and to press for implementation and enforcement of all its standing declarations against illicit trade. Without concurrent efforts to combat all forms of illicit trade – and the associated corruption and organized crime – the global community will not be able to achieve the overarching sustainable development goals to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity. Fighting illicit trade must therefore be seen not only as a global responsibility of G7 leaders, but also recognized as a prerequisite to achieve the UN SDGs.

Given the G7’s recurring commitment to the 2030 Agenda, these threats compel the G7 to amplify its attention to the problem and to press for implementation and enforcement of all its standing declarations against illicit trade. Without concurrent efforts to combat all forms of illicit trade – and the associated corruption and organized crime – the global community will not be able to achieve the overarching sustainable development goals to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity. Fighting illicit trade must therefore be seen not only as a global responsibility of G7 leaders, but also recognized as a prerequisite to achieve the UN SDGs.

Spotlight on improving integrity in Customs and free trade zones
Breaches of integrity in global supply chains, especially in border control, present significant non-tariff barriers to trade that hamper economic growth and trade performance. Recent figures from the OECD show that improving integrity policies in customs alone has the potential to reduce trade costs by 0.5% and 1.1%.²⁰ Breaches in integrity in customs also contribute strongly to facilitating illicit trade: Customs officers are on the front-line conducting inspections and detecting and seizing illicit goods. If this role is compromised, the system fails and enables opportunities for illegal trade, criminal activity, illegal financial flows and trafficking in products and persons. Promoting integrity in customs can therefore generate dual benefits of reducing trade costs and mitigating flows of illicit trade, delivering significant benefits to the world trade system and economic development at large.

The misuse of transshipment points in cargo routings, especially through Free Trade Zones (FTZ), represents another challenge. Deceptive transshipment practices, mislabeling and fraudulent invoices allow illegal traders to bypass sanctions, trade tariffs and regulations by obfuscating the identity of the country of origin or the illicit nature of the goods. Unrestricted regimes for transshipment and transit of goods through FTZs contribute to a wide range of illicit activities, including money laundering, organized criminal activity in illegal wildlife trade, tobacco smuggling, fraud, and counterfeiting and piracy of products. OECD research shows that an additional FTZ within an economy is associated with a 5.9% increase in the value of exported counterfeit and pirated goods on average. Enhancing transparency in FTZs is an important measure to reduce trafficking vulnerabilities and strengthen the integrity of global supply chains.

The Charlevoix Summit represents an opportunity for G7 Leaders to collectively underscore the importance of clean international trade by driving the process towards better integrity in customs and improved transparency of FTZs.

A unified business response to illicit trade
The transnational problem of illicit trade has clearly grown well beyond the capabilities of individual governments. What is needed is a sustained, holistic and coordinated response by governments to address the multifaceted nature of this threat. Equally important is the recognition that the private sector can be an important partner in the fight against the unfettered flow of fake and harmful goods across borders.²¹

Consequently, any long-term solutions to the threat of illicit trade will depend on sustained collaboration between governments and private sector partners. Business can contribute by continuing to develop technical solutions that protect the integrity of supply chain, and share intelligence, data, resources and measures that effectively control illicit activity. And business is willing to work with partners to convene stakeholders, improve awareness, expand the knowledge base, and energize the global dialogue.

Governments, however, need to improve regulatory structures, set deterrent penalties, rationalize tax policies, strengthen capacity for more effective enforcement, and educate consumers. This is a matter of urgency and G7 government efforts to fight illicit trade should be considered investments that pay tangible dividends to economic development and global security.

The Transnational Alliance to Combat
Illicit Trade (www.TRACIT.org) is responding to this challenge by leading business engagement with national governments and intergovernmental organizations to ensure that private sector experience is properly integrated into rules and regulations that will govern illicit trade.

TRACIT represents companies and organizations that have a shared commitment to combatting illicit trade and ensuring the integrity of supply chains. Addressing illegal trade – whether that be smuggling of alcohol, illegal logging, counterfeit pesticides or petroleum theft and trafficking in persons – presents common challenges for a growing number of industries. All stakeholders have an interest in stamping out illicit trade; and all benefit from collective action.

In this regard, business offers its support to the G7 to advance implementation of its many commitments from past Summits. And, we suggest that Charlevoix presents a timely opportunity for Leaders to elevate priority attention to illicit trade and work with business to address associated threats to safety, security, cybersecurity, natural resources and economic development.

Louis Bonnier is an experienced public policy specialist and international business advocate. Prior to joining TRACIT, he served as Senior Policy Adviser to the International Chamber of Commerce’s G20 CEO Advisory Group, where he crafted business policy positions and helped companies navigate engagement with G20 Leaders through the B20 Summit process. He was also principal author of the annual ICC G20 Business Scorecard, a seminal report evaluating G20 performance against international business policy priorities. Louis also served on ICC’s Business Action to Stop Counterfeiting and Piracy initiative, where he provided strategic policy advise on how to strengthen international engagement and advocacy on Intellectual Property (IP) protection and enforcement. His portfolio focused primarily on strengthening business engagement with key global governance bodies, including G20, BRICS, ASEAN and OECD. Louis holds a Master degree in Law from Stockholm University.
Contact:
louis.bonnier@tracit.org

¹WEF. (2015). State of the Illicit Economy. Briefing Papers, October 2015. Cologne/Geneva: World Economic Forum.
Retrieved from http://www3.weforum.org/docs/WEF_State_of_the_Illicit_Economy_2015_2.pdf
²CNBC. (2017, July 3). The illicit economy could be as big as a G7 country: Pro. CNBC.
Retrieved from https://www.cnbc.com/video/2017/07/03/the-illicit-economy-could-be-as-big-as-a-g7-country-pro.html
³G8. (2006). Combating IPR Piracy and Counterfeiting. Retrieved from http://www.mofa.go.jp/policy/economy/summit/2006/ipr.html
⁴G8. (2012). Camp David Declaration. Retrieved from https://obamawhitehouse.archives.gov/the-press-office/2012/05/19/camp-david-declaration, para 9.
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Retrieved from https://www.inta.org/communications/documents/2017_frontier_report.pdf
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¹⁴Kelly, A. (2017, September 19). Latest figures reveal more than 40 million people are living in slavery. The Guardian. Retrieved from https://www.theguardian.com/global-development/2017/sep/19/latest-figures-reveal-more-than-40-million-people-are-living-in-slavery
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