Incentive Imbalances in Thai Customs Enforcement Encourage Illicit Flows

Felix Albrecht*

In Thailand, corruption in customs enforcement is a fact of life. The Bangkok Post notes that customs officials almost universally demand “tea money,” or bribes, and bonuses to customs officials based on a percentage of a confiscated shipment’s value cause the length of inspections to stretch out interminably. These specific customs procedures and rules, along with the flawed incentive structures they create, have led to an increase in illicit financial flows (IFFs) from Thailand due to trade mispricing.

Illicit financial outflows due to trade mispricing occur when individuals or companies use export under-invoicing and import over-invoicing to transfer funds abroad. For example, if I wanted to transfer funds from my business into an offshore account, I might record an import shipment as more expensive than it really is. Then, I would pay the exporter the true value of the goods and transfer the remainder of the invoiced amount into my offshore account.

According to a recent study from Global Financial Integrity (GFI), from 2000 to 2008 Thailand lost over USD 46.2 billion in illicit financial flows due to trade mispricing. Furthermore, trade mispricing is a growing problem in Thailand. According to my calculations, illicit outflows due to trade mispricing from Thailand are growing as a percentage of Thai exports, reaching a high of 10% of exports in 2008.

Customs enforcement mechanisms are a key piece of the trade mispricing puzzle. When corruption is widespread among customs officials, companies and individuals wishing to funnel money abroad could easily give an official a bribe, called “tea money” in Thailand, for them to overlook misinvoicing. In Thailand, incentive structures in customs enforcement of imports encourage corruption further.

The Bangkok Post writes that until just recently this year, customs officials would receive up to 25% of the value of import shipments confiscated for violations of smuggling laws. While this incentive was aimed at making sure customs officials were sure to catch violations, in practice, the incentive simply slowed down customs procedures. Officials, hoping to catch even the smallest infraction, would spend unreasonable amounts of time examining import shipments. Under these conditions, importers would have no choice but to bribe the official if they wanted to get their shipments through the process in a timely fashion.

Not only would customs officials gain a percentage of confiscated shipments: non-official informants who supply tips that lead to an arrest could be given up to 30% of the value of the shipments. Furthermore, according to the Bangkok Post, “most of the outside informers are actually nominees of department officials – or in some case rivals of a business operator being inspected – and they split the rewards.”

In February of this year, the Thai Customs Department announced plans to change the rewards compensation structure for customs officials. Under the new regulations, customs officials receive 15% of the value of smuggled shipments – down from 25 % – and a cap on the rewards given to officials was set at 5 million baht (USD 166,000). Non-official informants can still receive up to 30% of the value of the confiscated shipments, but their rewards are now capped at 10 million baht (USD 333,000). These changes simply put a band-aid over the problem. An incentive structure for customs officials where pay is based on the number and value of shipments confiscated will always encourage officials to spend too much time examining shipments. The caps on rewards payments may also be completely useless: the Bangkok Post writes, “Even capping the ceiling of each case at 5 million baht might not solve the problem. For shipments of larger value, officials could simply break them down into smaller cases that meet the 5-million-baht limit.”

These distorted incentives written into Thai customs regulation encourage a culture of corruption among Thai customs enforcement officials. The system of rewards for officials and non-official informants encourages slow customs processes, and gives importers an incentive to bribe officials in order to speed up shipments. Because bribes to customs official are so commonplace in imports to Thailand, it is easy for importers wishing to transfer illicit flows out of Thailand via import over-invoicing to get officials to overlook faked invoices. These problems are evident in Thailand’s illicit financial flow estimates.

According to the GFI study, from 2000 to 2008, trade mispricing was the source of over 70% of Thailand’s total illicit financial flows. Furthermore, import over-invoicing comprised the majority of IFFs due to trade mispricing, reflecting the corruption and distorted incentives evident in import procedures. While Thai customs procedures are not the only driver of illicit financial flows from Thailand, they certainly contribute to the issue. Clearly, further customs reform is necessary if the Thai government is to deal with the massive amount of capital leaving its country illegally.