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Corruption at Venezuelan ports has flourished since the 2009 nationalization by the late president Hugo Chavez. (Photo: Bolipuertos)
Wednesday, December 11, 2013
Perspectives

Stuck in the Bottleneck: Latin America Port Corruption


Deficient infrastructure, cumbersome bureaucracy and economic nationalism spur corruption at Latin American ports. 


BY THOMAS FAVARO
AND NIELS LINDHOLM
 


Latin American ports have received their fair share of bad press in recent years. Just this November, the Mexican army took over security operations at the port city of Lázaro Cárdenas as part of continuing operations to fight the Knights Templar cartel. The local port has long been a hotbed for the group's illegal trade and extortion rackets, and will be a critical test case for the Mexican government in its fight against the infiltration of organized crime among weak local and state authorities. 


LEARNING THE HARD WAY

While infiltration by drug-trafficking groups represents an exceptional case rather than the rule, it is common knowledge that corruption in ports is a common threat for companies operating across Latin America. In recent years, a range of corrupt schemes – from small bribes to tax evasion and bid rigging – have been uncovered throughout the region by local law enforcement investigations or during occasional government crackdowns against corrupt port officials. In June, customs officials at La Guaira port, Caracas region, Venezuela, were taken into custody for crimes of extortion against companies in the maritime business. In Brazil, a federal police investigation targeted port officials at four terminals (Rio de Janeiro, Itaguaí, Vitória and Santos) and found evidence of companies paying bribes to tax auditors and customs brokers in order to facilitate the entry of goods into the country. A November 2012 investigation in Colombia at the Barranquilla port also targeted local national police officers under similar accusations. Even the expansion of the Panama Canal, one of the world’s largest infrastructure projects, was tainted by allegations of bid rigging: in 2010 a local subsidiary of a US-based engineering firm was found guilty of conspiring to make payments to Panamanian government officials to secure contracts. Two executives were handed prison sentences.


Multinational companies are also under scrutiny from global anti-corruption initiatives, and illicit practices involving foreign customs have been the subject of several investigations. Since 2012, at least two oil and gas companies have been fined under the Foreign Corrupt Practices Act (FCPA) in the United States after admitting to paying bribes to custom officials (in Argentina and Brazil, respectively) to expedite import/export clearance at the ports. In April 2013, a US clothing retailer was fined $1.6 million to settle claims related to violations of the FCPA in Argentina. The company admitted to having paid around $600,000 in bribes to customs officials to import goods without customs inspections, avoiding related paperwork. The payments were made through a third party.


LACK OF INFRASTRUCTURE AND CORRUPTION

Latin America is a prime exporter of commodities, and the region has experienced a steady increase in container traffic over the past two decades; between 1990 and 2010 the annual growth rate was over 14 percent, according to ECLAC figures, and today the region accounts for roughly 7 percent of the world total. Traffic is heavily concentrated in four countries – Brazil, Panama, Mexico and Chile – which together account for 54 percent of all the flow, though Colombia has been closing the gap each year as its growth rates increase. High levels of trade will persist in the short-to-medium term, particularly with China – the country is forecasted to become Latin America’s second-largest trade partner after the US and supplanting the EU by 2015.

However, infrastructure capable of handling growth and substantial improvements in port capacity is isolated to only a few countries in this region. As a result, port congestion is a reality throughout Latin America, a problem which, coupled with poor transport links, has pushed up logistics costs and created a breeding ground for corruption practices. In the Brazilian port of Santos customs clearance takes, on average, 21 days to clear a container, as opposed to two days for Rotterdam. The average waiting time for a ship to berth is 16 hours – almost three times longer than in 2003. Such bottlenecks are one of the main reasons why, since 2008, the port of Santos is no longer Latin America’s busiest port (it is now third, behind Colon and Balboa, the Atlantic and Pacific terminals of the Panama Canal).


Many countries in the region are starting to address the infrastructural and institutional deficiencies within the ports sector, in line with growing awareness of the importance of facilitating trade to stimulate economic development. The expansion of the Panama Canal, which began in 2007, is expected to double its capacity by 2015. After two decades of growth rates close to 20 percent, Cartagena in Colombia is now the fifth largest port in the region. In 2012 Brazil kick-started a $26 billion privatization program aimed at improving the capacity of 95 maritime terminals.


High levels of private investment and the continuing implementation of port modernization programs provide reason for cautious optimism for the industry’s medium-to-long-term prospects. However, the reform of the ports sector so far has had only limited impact on overall corruption risk, which is currently widespread in Latin America – not least because serious efforts by local authorities to address the issue have been few and far between.

STATE INTERVENTION AND CORRUPTION

Deficient infrastructure and cumbersome bureaucracy are not the only factors fuelling corruption in Latin American ports. The renewed attempts of economic nationalism in vogue in some countries in the region have also fostered the corruption risk affecting regulated activities such as customs and port operations.

In Venezuela, for instance, corruption has flourished in the sector since the 2009 nationalization of the country’s ports by the late president Hugo Chávez (1999-2013), who then created a joint Venezuelan-Cuban venture (Bolipuertos) to operate them. The nationalizations increased bureaucratic red tape, mismanagement and capacity constraints, all of which created an environment where efficiency suffered and bred the conditions for the growth of corruption – corruption that ranges from infiltration by drug trafficking groups to overbilling to circumnavigate currency controls. The lack of oversight over Cuba’s role in port administration has also contributed to the corruption problem, in particular at Puerto Cabello, which handles 75 percent of the country’s imports. Moreover, corruption in Venezuela’s ports has far-reaching effects: the country’s growing dependence on imports means that the port sector is critical to the economy, which is already suffering under the weight of multiple imbalances and distortions.


Some of the policies adopted by the administration of Cristina Fernandez have also fostered corrupt practices in Argentina. Since the 2008-09 global financial crisis, the Argentine government has sought to manage its trade balance through a series of protectionist measures. As a result, customs procedures have become more cumbersome and difficult. Non-automatic licenses, which, according to the WTO, should be released within 60 days, can take much longer to be processed by customs officials. This has fostered corrupt practices at ports as companies seek to fast-track their imports. A federal prosecutor in December 2011 filed a complaint against the then Secretary of Industry (who resigned a year later) in relation to allegations that he co-ordinated a major bribery scheme. The accusations suggest that corruption may not be confined to low-ranking officials – the secretary of industry is a key position in the Ministry of Industry.

KEY CORRUPTION RISKS AFFECTING PORT OPERATIONS

Based on Control Risks’ experience in Latin America over the last 30 years, the following corruption risk typology can be drawn for port operations in the region:

  • Operating within ports: It is a commonly acknowledged risk in Latin America that local public officials can seek a personal benefit from their position and request small bribes from companies. However, the frequency of demands for “facilitation” payments (to expedite or secure customs procedures) varies substantially across the region. Direct and indirect interaction with port administrators and customs officials increases the risk of facing demands of small bribes in order to be granted licenses to operate at ports, for instance within a bonded custom area.
  • Infrastructure bids for port construction, expansion or maintenance: Public tenders for infrastructure construction often require a local partner; this third party may rely on corrupt practices to promote the consortium’s interests with local decision-makers and officials involved in the tender award process. Bribes may also be requested by local regulatory agencies to issue operational or environmental licenses for the project. Typical cases involve “recommendations” to select a locally outsourced company to handle part of the work; the company then charges an overpriced fee to be split as graft for the decision-makers involved in the tender process.
  • Import and export of goods: The bureaucracy involved in the import/export process in Latin America sustains the existence of customs brokers, making the likelihood of bribery greater. In a recent case in Argentina, Control Risks’ investigation team found that a broker had been used to funnel funds to customs officials in order to expedite the release of imported equipment on behalf of a local firm recently acquired by our client.

MITIGATING THE RISK OF CORRUPTION IN LATIN AMERICAN PORTS

Greater enforcement of both domestic and international anti-corruption legislation creates significant challenges for businesses transporting maritime cargo in Latin America. As with any business operation involving interaction with government officials, robust and effective anti-corruption initiatives are required to mitigate the corruption risk. The following practices are particularly relevant in the context of port operations:

  • A full commitment to compliance: Corrupt officials tend to prey on “soft” targets, i.e. companies that have already made small payments or have not shown a clear commitment to not paying bribes. The risk is also heightened with deficient business processes, as mistakes are opportunities for corrupt agents to charge payments to correct them. Therefore, whenever hiring port-related support (via broker or external counsel), these services should focus on improving the quality of the company’s process, rather than on the outsourcing of the relationship with port authorities altogether.
  • A true concern for the company: Given the risk, regular engagement with mid-to-high level port officials should preferably be handled by senior company executives. These meetings will be a forum to continually reinforce the message that the company will not pay bribes and only operates in full compliance with local and international regulation.
  • An investigative capability to proactively examine issues when they are detected: Whether conducted in-house or outsourced, investigations can effectively identify corruption cases, determine the risk and make practical recommendations at the local level to better protect the business.
  • Thorough and regular vetting of third parties, in particular customs brokers, local consortium partners and specialized law firms focused on “easing” administrative processes: Contracts should be reviewed to ensure that fees are within market norm and that there are no hidden expenses that could pose concern.
  • Adequate time: Inefficient bureaucracy occurs across most of the region and there are no miraculous solutions to lengthy delays, hefty import duties, or complex tendering processes. Companies should factor in these delays to avoid finding themselves under pressure to expedite service – and at the mercy of customs authorities.


Niels Lindholm is the practice leader for business intelligence in Brazil for Control Risks and Thomaz Favaro is an analyst focusing on Brazil and the Southern Cone for Control Risks. Republished with permission from Control Risks.


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