Distributed Ledger Technology in International Trade: Rethinking the Role and Necessity of the Customs Declaration

Abstract

Current research regarding distributed ledger technologies includes the extent to which these technologies can enhance the compliance function. This includes corresponding research on how distributed ledger technologies in international trade can enhance customs compliance, promote disintermediation, and create new efficiencies. Utilising distributed ledger technologies in the customs setting raises fundamental questions regarding the role of customs declarations when information necessary for a traditional declaration is retrieved from a distributed ledger technology-based global trade platform. As such, this article focuses on one technology-driven question for custom law and practice: does the use of distributed ledger technology-based tools and smart contracts for customs compliance purposes subject the idea of a “declarant” or “declaration” to potential re-characterization? Special attention is given to the idea of declarant and declaration under the Revised Kyoto Convention and a possible way forward through the recent Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific.

I. Introduction

Current research regarding potential uses of blockchain technology1 includes researching how blockchain can enhance compliance monitoring, regulatory compliance, and due diligence.2 The idea behind this research is a hypothesis that blockchain can be an all-in-one monitoring tool, information collector, analyst, reporting tool, and compliance and auditing tool.3 Entries into the blockchain are (essentially) immutable, verifiable, and traceable, providing an indisputable audit trail that can be used internally to inform and improve an organisation’s compliance function and externally in the case of a review by a government agency.4 There are several situations where governmental agencies need to review or audit information held by individuals or organisations. For purposes of this article, however, the author will focus on matters relating to international trade and movement of goods across borders and related routine governmental tasks such as reviewing customs declarations, cross-validation, and government scrutiny of information supplied in a largely self-assessment environment.5 This article will not discuss import procedures or clearance for other domestic government agencies that may be necessary under national law (e.g., food and medicines regulatory agencies, agriculture and environment regulatory agencies, or fish and wildlife regulatory agencies) or GATT Articles V, VIII, and X (all of which could be impacted in some way by the arguments outlined in this article). This article contemplates declarations relating to containerized shipments, not, for example, declarations made by travellers carrying goods across borders (although the principles discussed in this article could be creatively applied in these situations).

Transactions utilising blockchain technology are validated and added to the blockchain by network members who are (in theory)6 positively incentivized to ensure the integrity of the ecosystem.7 Companies can maintain near-real-time access to compliance-related data and supply access to regulators (including customs regulators) when necessary.8 Relevant customs authorities could, in turn, make faster (thus more efficient) assessments of customs compliance.9 Essentially, organisations could maintain a real-time and efficient “customs-ready” environment in which to conduct their international business.10 In this sense, there have been suggestions for a “smart import declaration” and similar tools to utilise the power of blockchain technology for various aspects of the customs function.11 Segers et al. (2019) note that “a declarant can automatically generate the import declaration by automatically aggregating information stored on the blockchain ledger, whilst customs authorities are ensured of correctness.”12 This kind of system should create efficiencies in international trade, possibly eliminating the need for some of the participants and steps traditionally necessary for the cross-border movement of goods.13 This, then, begs the question (and is the thrust of this article): does the use of blockchain-based technologies and smart contracts for customs compliance purposes subject the idea of a “declarant” or “declaration” to potential re-characterization? Another way to view the question would be to ask why, in an environment where information is accurate, up-to-date, transparent, and readily available to customs authorities, do we need to “generate” an import declaration? Can’t we use this technology (properly programmed to execute the regulatory logic of customs law) to handle this for us? Consider Lawrence Lessig’s observations in 1996:

If the regulator wants to induce a certain behavior, she need not threaten, or cajole, to inspire the change. She need only change the code—the software that defines the terms upon which the individual gains access to the system, or uses assets on the system. If she wants to limit trespass on a system, she need not rely simply on a law against trespass; she can implement a system of passwords. If she wants to limit the illegal use of copyrighted material, she need not rely on the threat of copyright law; she can encrypt the copyrighted material so only those intended to have access will have access. Always in principle, and increasingly in practice, there is a code (as in software) to assure what the code (as in law) demands, which means always in principle and increasingly in practice, law is inscribed in the code.14

Lessig’s observations were not in the context of customs regulation, but they are profound nonetheless in highlighting the possibility of technological oversight over the regulatory process.15 The regulator does not need to threaten or cajole; the regulator only needs to change the (software) code because, in essence, the law is manifest in the code.16 In this sense, Lessig continues:

Code is an efficient means of regulation. But its perfection makes it something different. One obeys these laws as code not because one should; one obeys these laws as code because one can do nothing else. There is no choice about whether to yield to the demand for a password; one complies if one wants to enter the system. In the well implemented system, there is no civil disobedience. Law as code is a start to the perfect technology of justice.17

One type of software “code” could be what is referred to as a smart contract.18 Smart contracts19 on the blockchain can be used to automate the monitoring of transactions and information stored on the blockchain.20 To use Lessig’s ideas to create an analogy, the smart contract is a manifestation of the “law” translated into “code” and housed on the blockchain.21 A smart contract, essentially a self-executing, autonomous software protocol, can be programmed with parameters that will prevent an action or send an alert if an element of the compliance function (here, laws related to information required in an import declaration) is breached, and in turn trigger measures to deal with the compliance function breach (including a “smart disclosure” to customs or other relevant parties).22 Since smart contracts are self-executing and autonomous, there is no need for a human agent to intervene.23 Therefore, if import information is stored on the blockchain utilising regulatory logic in the form of a smart contract, then there is no further need for a declarant to take the unnecessary (and inefficient) step of repeating what is already readily available on the blockchain.24

Reference has been made to “humble” vending machines when explaining the logic behind smart contracts.25 During a typical transaction involving a vending machine, the mechanism inside of the vending machine is interpreting an input message—the buyer’s insertion of money and item selection—leading to an output (based on the premise that the vending machine is not broken, which is always a possibility).26 In this sense, when the money is put in the vending machine, it is unnecessary to have another mechanism to state (again) that the money has been put in the vending machine. This may, in fact, introduce errors and inefficiencies in an otherwise stable transaction.27 Similarly, we do not need a separate declarant or declaration to state what is already clearly observable and quickly analysed by regulatory logic on the blockchain. This extra step has the potential to introduce errors and is at odds with the ultimate goal of having an efficient customs ecosystem.

II. World Customs Organization Observations

In a relatively recent World Customs Organization Research Paper titled Unveiling the Potential of Blockchain for Customs, the author, Yotaro Okazaki, makes some notable observations about the power of utilising blockchain technology for customs purposes.28 The author, referring to utilising the blockchain to capture various information about shipments, states, “Customs would be able to see the necessary and accurate data (seller, buyer, price, quantity, carrier, finance, insurance etc.) that have been tied with the goods to be declared and also keep track of the location and status of such goods in real time.”29 This notable observation highlights the power of the blockchain to provide transparent information.30 It also highlights the potential for real-time observation of the status of the goods and (by extension) the possibility of real-time compliance observation by regulators.31 The author continues, “Customs could automatically extract information from the primary sources for declaration purposes, thereby enhancing the accuracy and quality of their data and immutability thereof as well.”32 This notable observation highlights the power of the blockchain to help extract and utilize primary source information and the potential for customs authorities to use this information for declaration purposes, leading to faster declaration processing.33 Critical observation of Okazaki’s text leads to a deeper examination of what precisely the customs declaration process is (that is, the discrete act of declaring) when utilising robust information captured on the blockchain, whether there is a moment of declaration (compared to a continuous real-time analysis), and whether it is necessary for any declarant in the process at all (given the transparency of and access to blockchain information).34 Consider Botton (2018):

Using blockchain within a supply-chain would provide a firm with the infrastructure necessary to remove the need to secure each transaction or step in the supply-chain through intermediaries via registration, tracking and certification. Information on any shipment—whether it be a proof of purchase, a clearance form, a bill of lading, insurance—can be made part of a block, a transparent chain of custody, and be accessible to suppliers, transporters, buyers, regulators and auditors. Having all this information in one location would not only lower transaction costs but also decrease auditing and accounting costs as well.35

This notable observation highlights the power of the blockchain to become the vehicle of regulatory disclosure (at the exclusion of other unnecessary individuals or entities).36 Bottom’s observation highlights the lack of necessity for some intermediaries to certify certain aspects of the blockchain infrastructure, thus promoting disintermediation.

Moving back to Okazaki, and relating to the payment of customs duties, the author observes:

Once the data on certain transactions as between an exporter (seller) and an importer (buyer) are recorded on the blockchain and thus made accessible to Customs, importing country’s Customs, for example, will collate the importer’s declaration with the relevant data that can be retrieved from the network involving the two parties. If these transactions are taken over by smart contracts which self-execute, the importer’s purchase of goods, which is never completed without the remittance of the equivalent value of funds (money transfer) to the exporter, can be automatically followed by the duty payment at the time of goods clearance.37

This notable observation highlights the power of self-executing smart contracts working along with information on the blockchain.38 Properly programmed smart contracts could be utilised to capture the regulatory logic of customs rules.39 When used in conjunction with information captured on the blockchain, this system should automatically (and in real-time) test for and report back on specific customs compliance issues. A well-programmed smart contract programmed with relevant regulatory logic (utilizing IoT data points) would be capable of monitoring the movement of goods and cross-border transactions in real-time.40 Finally, access to a broad spectrum of primary source information on the blockchain should “help to deal with the issue of Customs valuation and transfer pricing; i.e. enabling Customs to better assess the veracity of import/export declarations, thus rejecting the ‘price actually paid’ (as declared) and applying alternative methods for Customs valuation in some cases involving profit shifting.”41 Again, would there even be the necessity of a declaration in this situation? Why should it be necessary to “assess the veracity” of declarations submitted by an unnecessary intermediary (the declarant)? Why not start with assessing the information on the blockchain without the exercise of having a declarant? A better and more efficient approach could be to use primary source information at the onset, skipping the information traditionally disclosed in a declaration.42 Customs would not need to assess the veracity of import declarations, but simply conduct a real-time automated audit of primary source information related to the transaction captured on the blockchain.

III. The Revised Kyoto Convention

This article proposes a change in the idea of both a declaration and the declarant when utilising distributed ledger technology to capture information relating to the international shipment of goods and using that information for customs purposes. This section will discuss the declaration and declarant and their roles in a transaction, current guidelines for their role, and propose language that can be incorporated into rules or guidelines relating to the declarant that accounts for using blockchain technology in cross-border transactions.

The standard protocol for customs procedures and practices is the International Convention on the Simplification and Harmonization of Customs Procedures (as amended, the “Revised Kyoto Convention”).43 The Revised Kyoto Convention comprises a body, a general annex, and multiple specific annexes.44 Nonbinding guidelines are also included.45 The Revised Kyoto Convention is overseen by the World Customs Organization and is an update and revision of the International Convention on the Simplification and Harmonization of Customs Procedures.46

The Revised Kyoto Convention has as one of its aims to “contribute effectively to the development of . . . trade and exchanges by simplifying and harmonizing Customs procedures and practices.”47 This simplifying and harmonizing can be accomplished, as the preamble of the Revised Kyoto Convention points out, by adopting “modern techniques” and the use of information technology.48 These sentiments emphasize that the Revised Kyoto Convention and its parties prefer simplicity and the use of technology-driven solutions.49 Further emphasizing this preference of simplicity, Standard 6.2 stresses that customs control (meaning the measures applied by local customs authorities to ensure compliance with customs law) “shall be limited to that necessary to ensure compliance with the Customs law.”50 In other words, anything that is unnecessary to ensure compliance with relevant Customs law should not be included in the customs process. Furthermore, Standard 3.31 states that “[f]or the purpose of checking the Goods declaration,51 the Customs shall take only such action as they deem essential to ensure compliance with Customs law.”52 This standard recognizes the possibility of modifying custom control in a more efficient way, and it does not rule out the possibility of eliminating certain elements altogether. Transitional Standard (which means a standard for which a longer period for implementation is permitted) 6.9 calls for the use of “information technology and electronic commerce to the greatest possible extent to enhance Customs control.”53 In addition, transitional Standard 3.21 allows for the lodging of the goods declaration54 by electronic means.55 This leaves open the possibility to use blockchain and smart contract technologies for the enhancement of customs control.56

The declarant for purposes of the Revised Kyoto Convention refers to “any person who makes a Goods declaration or in whose name such a declaration is made.”57 Standard 3.8 states that the declarant “shall be held responsible to the Customs for the accuracy of the particulars given in the Goods declaration and the payment of the duties and taxes.”58 Given the possibility of information on the blockchain being sufficient to express all the necessary information for customs control and to ensure compliance with customs law, the idea of declarant and her declaration should be amended. At a minimum, the convention and guidelines should contemplate the declarant as optional; for example, under rules relating to the goods declaration, a standard could be drafted as follows:

Any records necessary for clearance and other customs control formalities may be kept on, or by means of, or be in the form of, any information storage device, method, or one or more electronic networks or databases (including one or more distributed electronic networks or databases), provided that the records so kept can be readily accessed by the Customs for clearance and customs control formalities. When records are kept in such manner, such records shall be valid and admissible in evidence, and accepted for all other purposes, to the same extent as if submitted by a human declarant.59

National customs authorities could regulate as they see fit the parameters for how and to what extent information can be “readily accessed.” The idea of “readily accessed” expresses the notion that a declarant does not need to submit these items; the items simply need to be accessible by the relevant customs authorities. The rise of IoT will provide data points that include, for example, the moment of entry of cargo containers at ports of entry, their contents, and other relevant information necessary for customs clearance.60 A human declarant, therefore, would not need to initiate a declaration under these circumstances.

IV. Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific

One vehicle to fully explore the contours of this idea of rethinking the declarant and declaration would be the Economic and Social Commission for Asia and the Pacific (“ESCAP”) and its recent Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific (“Framework Agreement”).61 The Framework Agreement was adopted on 19 May 2016 as a United Nations treaty and entered into force on 20 February 2021.62 The Framework Agreement encourages the digitalisation and simplification of the trade process, noting that “paperless trade makes international trade more efficient and transparent while improving regulatory compliance, particularly if trade-related data and documents in electronic form are exchanged across borders.”63 The Framework Agreement is seen as complementary to the WTO Trade Facilitation Agreement.64

Under the Framework Agreement, the parties must “initiate and launch pilot projects on cross-border exchange of trade-related data and documents in electronic form, in particular among customs and other regulatory agencies.”65 Working Groups must also be established to report on the implementation of the action plans66 under the Framework Agreement.67 This article suggests that this should include a distributed ledger technology and smart contract working group and pilot project that includes utilising distributed ledger technology, focusing on customs and regulatory issues.68 Indeed, the Technical Readiness Assessment Guide (drafted to support the Framework Agreement) notes that a good practice for the establishment of electronic systems for cross-border trade includes the possibility “to adopt some emerging but appropriate technologies that may have potential to better facilitate international trade, e.g. blockchain solutions for speeding up cross-border payment transactions, or for increasing efficiency and reducing risks of trade finance services, or for goods traceability.”69 In addition, Article 5 of the Framework Agreement expresses certain general principles relating to paperless trade, which are attainable in a blockchain environment.70 With the right legislative approach, blockchain technology is one possible solution for fully realizing the goals of the Framework Agreement.71

V. Conclusion

Blockchain technology can be an all-in-one monitoring tool, information collector, analyst, reporting tool, and compliance and auditing tool. Although one UN White Paper still contemplates the need for a customs declaration (indeed, stating that this idea is a “critical part of the data landscape”), this article argues otherwise.72 Researchers understand that blockchain has the potential to disrupt the supply chain industry, adding safety and efficiency into the process. However, traditional modes of thinking persist when confronting new frameworks. This article has challenged these traditional modes of thinking by proposing the elimination (or at least a rethinking) of the designation of declarant and the traditional declaration for customs purposes.

The idea of allocating liability would still exist under this new regime and would be placed with appropriate stakeholders (here, for example, the importer of record).73 The importer of record’s liability for customs duties and other taxes and fees will remain intact. The importer of record will also be responsible for all other relevant regulations relating to its shipment. To be clear, this article does not argue for the elimination of relevant legal responsibilities inherent in the cross-border movement of goods. It does, however, argue for the promotion of disintermediation which will create new efficiencies. For example, the importer of record would not need to outsource the declaration process to a customs agent, customs broker, or clearing agent (either directly or indirectly). A well-programmed blockchain could handle this.

As new technologies create new paradigms, there is a tendency to use existing cognitive frameworks to interpret and regulate the new paradigm. This includes, for example, using existing legal ideas to try to regulate distributed ledger technology in specific uses that have traditionally been paper-driven. Sometimes old ideas must pass on (or at least be drastically changed). Existing cognitive frameworks must evolve along with new technology. And similarly, the law must evolve along with new technologies, even those legal ideas that seem so fundamental (and seemingly unchangeable) to a legal framework (like the customs declaration). This article challenges one of those ideas, but this is not the only idea that should be challenged as we move forward in this unprecedented era of technological change that is impacting so much of the legal landscape. The process of adopting new and fundamentally transformative technology is, understandably, almost always disruptive and challenges our current thinking.74 However, we must confront these contradictions to our schema by using equally disruptive ways of thinking. This includes rethinking the role of the customs declarant and her declaration.