The new VAT may make a fortune for criminals

Pressure will be on the UAE and the other GCC countries to make sure they do everything they can to stop smugglers from taking advantage of a changing market.
Michael Ellis says a balanced approach by GCC authorities is needed to counter smuggling.
By Ali Khaled
Sun 02 Jul 2017 12:03 PM

With GCC countries set to implement tax on tobacco and sundry products as early as this year, there is a real danger that the region is about to witness a spike in illegal trade.

According to Michael Ellis, managing Director at Ellis & Associates and former Assistant Director, INTERPOL Trafficking in Illicit Goods and Counterfeiting Unit,  it is an expected threat, one that is potentially very damaging.

“Experience dictates in different parts of the world that when a product, especially a fast moving consumer good, becomes expensive for whatever reason then there’s opportunities for criminals to exploit opportunities,” he says. “To try and deliver cheaper products by illicit trade is potentially a consequence of that.”

In March, the UAE announced that tobacco products as well as energy and fizzy drinks will be subject to value added tax (VAT) sometime this year. While a unified tax across the GCC is preferable, Ellis sees potential issues that could come as a result.

“Obviously, countries have to depend on the robust border managements that they have. For the flow of goods across the GCC, the impact would depend on the response of the law enforcement community. If you think about the European Union where there are few controls now, this becomes easier [for illicit trade].”

The social and economic aspects across the region will be wide-ranging. In his experience, Ellis says profits from illicit trade and smuggling invariably leads to an increase in illegal activity elsewhere.

“There are many examples where funds from illicit smuggling is then diverted into other types of crimes,” Ellis says. “From one aspect you have potential for funding for other types of crime, and the other direct economic impact is if a legitimate market is being flooded by a cheaper product, there’ll be an impact on that market because consumers are buying from the black market.”

A thriving black market will negatively impact the opportunities for the genuine businesses to flourish. The consequences can be far reaching for the wider economy.

“Once that happens, you will see downturn in job opportunities, in investments and in development,” Ellis says. “The consumer thinks they’re getting a good deal, but in the longer term they are probably causing more harm because these are smuggled goods that’ll impact genuine business.”

A significant effect on health would also be felt.

“Whatever controls are placed by governments will be undermined by illegal activities,” Ellis says. “In terms of counterfeit products, there will be health and safety implications.”

“The obvious one is medicine and the other one is food,” Ellis says. “Other examples I’m aware of — especially across the GCC — are car parts. Substandard, counterfeit parts that will break and airbags that will go off for no reason. There’s a huge list of products traded illegally that would impact on consumers health and safety.”

Ellis believes the way to tackle the problem with best practices is for national enforcement agencies, border authorities and drug and food administrations to form partnerships with legitimate industries in the GCC.

“They can understand the dimensions of the crimes and illicit trade, they can work to identify the products, the routing of legitimate trade,” Ellis says.

“The industry will know what the genuine product looks like, they will understand smuggling techniques, which need to be shared. Obviously goods are smuggled in so many different ways, the legitimate industry can share with agencies covert or overt security features that are embedded in so many different products which allow tracking and tracing of some products as they go across borders.”

“Whether it’s pharmaceutical or automobile, it’s the industry that should know about the real route, and they’ll know what their real product looks like,” he says.

It is crucial that these partnerships are not just forged with private sectors, but built across the region, so authorities can share information about what they are experiencing.

With tax for certain products imminent across the GCC, Ellis says a balanced approach by the authorities is needed.

Taxable goods should not burden the consumer, he says. “We’re seeing in different parts of the world when one particular product is, say, five, six, seven times cheaper than in another country, and there are means of smuggling that product across the borders undetected. If I’m a criminal, I think I’m going to make 80, 90, 100 percent return then it’s something I’m going to do. And why not?

“Unless the authorities are prepared, are trained, are aware of the threats, are aware of the lengths that these criminals will go to make their money, it will continue unhindered. The consequences will be an impact on revenue for criminals and on local markets, which are being destroyed because everyone is buying from the black economy.”

Some illicit trades are more complicated to combat

For one example, the sale of exotic, endangered and dangerous animals

as well as animal products continues to take place in certain parts of the UAE and GCC, much as it does around the world, despite governmental restrictions.

“That’s a tough one because it’s almost a cultural issue,” says Michael Ellis, managing Director at Ellis & Associates. “In some parts of the world, certain products are believed to bring health and vitality. In other parts of the world, having certain animal products is maybe a symbol of status. I think the approach should come from different directions. There is need for education, trying to instil awareness on the wider impact.

“An individual may believe he’s entitled to do this because it’s what his father and his father’s father did, and trying to break that chain is just a matter of education and really trying to appeal to someone’s conscience about what it is they are doing.”

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