FZW talks to Mr Richard Heath, Founder & Managing Director, Richard Heath (IP) Associates Ltd., about upholding intellectual property rights and other concerns facing free zones

Why are strong intellectual property protections a major consideration for investors when considering establishing a presence in a free zone?

A strong Intellectual Property (IP) Legal Framework is critical for investor confidence: IP is the main intangible asset base in any business and is the main driver of growth. At the very least it adds value to the bottom line thereby allowing companies to invest in R&D leading to innovation. It encourages healthy competition, deters illegal counterfeiting & piracy, which have links to organised crime, and it disrupts illicit trade. All of these factors can help to inspire confidence for investors looking to establish a presence in a free zone, as indeed in any market, thereby leading ultimately to enhanced foreign investment in that market and economic prosperity for the nation in which the zone(s) is/are based.

To what extent does the special customs status of free zones pose a unique risk regarding the transit of counterfeit goods?

A common misconception is that free zones are somehow considered to be extraterritorial or a regulation free enclave within a sovereign state, without national Customs or Customs legislation, and law enforcement more generally. This confusion can lead to an environment where illicit activity can infiltrate and flourish within the zone and tarnish the reputation of the country concerned as a place to invest.

The World Customs Organisation (WCO) has tried to address this through the Revised Kyoto Convention (RKC), which states that goods are outside the Customs territory only insofar as import duties and taxes are concerned. The RKC contains a number of guidelines that would directly address the problem of counterfeit goods originating or transiting in free zones, including:

  • Explicit Customs jurisdiction over FTZs
  • Specific rules on origin of goods
  • Special transit and transhipment procedures

Regrettably however, accession to the provisions of the RKC governing FTZs is optional, not mandatory and very few nations have elected to implement them. Making these provisions mandatory would go some way to address the problem by giving full authority to Customs within the FTZ and requiring them to act in a transparent and professional manner, thereby facilitating legitimate businesses.

What measures have international organisations undertaken in recent years to crack down on criminal syndicates use of free zones?

Effective enforcement of Intellectual Property Rights (IPRs) in free zones has regrettably lagged behind International Conventions and Agreements designed to strengthen it. In particular most such conventions contain so-called “minimum standards” which allow considerable scope for interpretation, leading to the unintended consequence of minimum action. International Governmental Organisations, in particular WCO and WTO, have a critical role to play here in encouraging their members, to go further than just minimum standards and instead set the standard by which others can judge and act. WCO’s Revised Kyoto Convention (RKC) and WTO’s Trade Related aspects of Intellectual Property Rights (TRIPS) agreement are two examples of such conventions and if WCO & WTO could be seen to be strengthening their approach to national Governments adherence to their agreements, that would go some way towards tackling the problem. Private sector international organisations such as the International Chamber of Commerce’s Business Action to Stop Counterfeiting & Piracy (ICC/BASCAP) and the International Trade Mark Association (INTA), together with their counterparts at national level (IP lead trade associations), have been encouraging the IGOs and national Governments through Public Private Partnerships and awareness raising activities aimed at capacity building, and some progress has been made in this regard; more can and should be done by both IGOs and national Governments in this area though. For example, improved Customs enforcement depends not only on stronger provisions in international agreements, but also upon countries adoption of these provisions into stronger laws. Those laws could incorporate flexibility into the TRIPS Agreement to address many issues right now. Moreover, courts can only apply the laws once they are enacted. A number of recent court decisions have upheld the authority to regulate activity in FTZs, but judicial authorities cannot, in most countries, overcome limits on the reach of Customs Authorities proscribed in national laws; if that could be addressed, real progress could be made.

In which countries do you see strong legal regimes being implemented to stymy intellectual property theft, counterfeiting, and trafficking of illicit substances in free zones?

Whilst much good work is underway it is difficult to single out individual free zones in countries from the thousands that are in operation around the world, two are however worthy of mention, both coincidentally in Latin America: Panama & Chile.

Firstly Panama – with 2,200 companies, the Colon Free Zone is the world’s second largest FTZ after Hong Kong. Panama has laws that protect IP in general. Law 35 of 10 May 1996 and Law 15 of 8 August 1994 allow the effective protection of a trademark owner’s IPR. In addition to sanctions under the Penal Code, the laws provide for suspension of permits allowing commerce in a free zone and in certain industries; damages compensation; and diverse measures to avoid future offences. The Intellectual Property Act gives ex officio powers to Customs to inspect and seize goods transiting through the zone and suspected of infringing IPR. The Customs Act provides that goods that enter an FTZ shall comply with sanitary and health regulations.

Sections 384 and 382-B of the Panamanian Penal Code also address crimes against industrial property rights and prohibit acts such as the circulation of products bearing trademarks that have been counterfeited, altered or imitated; and the transit of these types of goods through the country, even when the final destination is not Panama. Customs authorities are empowered (under Executive Decree No. 123/96) to inspect this merchandise and detain even the goods in transit if it suspects them of being counterfeit and of violating sections 384 and 382-B of Penal Code.

This illustrates vividly that, even in an FTZ as big as Colon (the world’s No.2), strong IPR Protection and zone productivity are not mutually exclusive objectives, but rather are complementary and synergistic.

Secondly Chile – Chile has two FTZs: the Iquique Free Trade Zone (ZOFRI) and Zonaustral. ZOFRI handles significantly more container volume. Both are considered models of FTZ management in Latin America. In 2003, Chile passed Law 19.912 giving Customs authority to implement border measures allowing inspection and seizure of illicit items within FTZs. Customs frequently exercises this right to inspect and seize. Customs officials in Chile also have the latest technology (x-ray machines), which enables them to search more effectively and completely.

This illustrates that a clear Customs mandate covering FTZs, together with investments in new technologies, is key to maximising Customs ability to deter, detect and intercept illicit goods within the free zone as well as outside it.

How far do governments and private operators need to go in creating a unified legal approach to enforcing Trade-Related Intellectual Property Rights in free zones?

Given that the Free Zone system is an integral and essential part of international trade and critical for ease of movement of legal goods from manufacturing-to-assembly-to-destination-end-markets, a number of harmonised legislative and regulatory measures could be adopted to make the system run more effectively. It is in no-one’s interests to create a dysfunctional bundle of national regulations, processes and procedures that are not aligned and in harmony with each other. Time and again with IP it has been proved that international harmonisation makes for the most effective protection and enforcement regime. Specifically, National Governments and Free Zone Operators could take any or all of the following actions, aimed at achieving a fully harmonised international system of free trade zones:

National Governments

  1. Empower Customs authorities with jurisdiction over FTZs’ day-to-day operations. Clarify that FTZs (or Special Economic Zone (SEZ) or free port, etc.) are under the jurisdiction of the national Customs authority; that national Customs has unrestricted rights to enter and observe operations, to audit the books and records of companies in the zone, and to validate goods status and conformance with tariff and non-tariff measures under the national Customs mandate.
  1. Review and implement national IPR legislation. Follow WCO Guidelines – including mandating the relevant provisions of the RKC — and include language that makes legislation applicable to all goods in the national territory, in all Customs regimes, including transit, in-transit, and free-zone regimes. Further, state that the discovery of prohibited goods may result in civil and criminal penalties.
  1. Grant Customs ex officio power to detain goods suspected of infringing on IPR, including goods in FTZs, SEZs, free ports, and the like.
  1. Particularly for integrated trading blocs or countries (i.e., APEC, NAFTA, EU, GCC, ASEAN, CIS, African Union, Mercosur, Andean Pact etc.), develop uniform Customs rules, regulations, and practices for FTZs, drawing on WCO and WTO provisions, including the draft recommendations and guidelines developed in 2006 by the WCO IPR Strategic Group and Global Task Force.
  1. Enable cooperation between national Customs authorities and the special authorities of FTZs or free ports to ensure efficient enforcement of anti-counterfeiting criminal and civil laws and to regulate the offence of trafficking in counterfeit goods.

Free Zone Operators

  1. Self-regulate to prevent piracy and counterfeiting (e.g., conduct standard due diligence in accepting businesses into zones).
  1. Allow and encourage national Customs authorities to evaluate the zone via physical observation of operations and verification of compliance with tariff and non-tariff requirements.
  1. Demand that national Customs apply best practices in exercising authority in zones (e.g., use ordinary company records as primary control documents in determining Customs free-zone status and in changing the Customs regimes).
  1. If the national government has committed to WCO SAFE (Framework of Standards) and has an Authorised Economic Operator (AEO) programme, consult with the Customs Authority for AEO recognition. If the country has notified the WCO of its intention to follow SAFE, but the national Customs authority does not yet have an AEO programme, lobby the authority to meet this commitment.
  1. For ease of goods status validation, consider the interface and exchange of data with the national Customs automated systems. Recommend that FTZ companies do the same.

For countries or business groups thinking of developing free zone programmes, what can be learned from past cases where legal ambiguity had an adverse affect?  

Once again, of the many thousand free zones around the world and the numerous cases, both published and unpublished, that have come up over the years, it is difficult to narrow down a single case study with the furthest reaching implications, but perhaps an early but long standing case from Jordan provides with a useful example where some valuable lessons were learned and which has proved to be a lasting object lesson in good practice.

Jordan: A Tale of Two Customs Agencies and One Special Economic Zone

Jordan’s Aqaba Special Economic Zone (ASEZ) was created in 2001 as a duty-free, low-tax, multi-sector trade hub. Advisors at the time recommended an extraterritorial model, with a Customs Agency independent of Jordanian Customs.

Unfortunately, creating a “second kingdom” for Customs functions isolated the zone from the global Customs community: In 2003, the zone’s Customs agency applied for WCO membership and was told that it would not be eligible until the UN recognised ASEZ as a state. Exclusion of Jordanian Customs also prevented businesses in ASEZ from becoming Authorised Economic Operators (AEOs), as envisioned by the WCO SAFE Framework.

Serious concerns over zone activities rose in 2005, when terrorists launched multiple Katyusha Rockets from ASEZ towards two US Navy ships. Jordanian Security forces later discovered more rockets in a zone warehouse. In 2010 ICC/BASCAP members identified the port of Aqaba as a transshipment point for IPR infringement, with counterfeit goods from the UAE and China entering into ASEZ for onward shipment to Iraq. Recognising the need for reunification with Jordanian Customs, ASEZ Customs Officers and functions merged into Jordan Customs in 2011, returning to “One nation, One Customs”.

In contrast, Jordan Customs monitors Jordan’s Qualified Industrial Zones (QIZs). QIZs were established in 1997 to promote stable relations between Jordan and Israel through joint production of products with free access to the US market. Jordan Customs Officers work in the QIZs, validating joint Israeli and Jordanian content and may be present during container loading for security purposes. Hundreds of thousands of high-end original clothing items, not counterfeit knockoffs, have been produced in the QIZs, proving that zones can be both more productive and more secure with national Customs inside zones.

Jordan’s contrasting experiences with ASEZ and Jordan’s QIZs illustrate well the importance for National Customs, as part of the international Customs community, to manage commodities and companies from inside free trade zones, special economic zones, and free ports. Jordan Customs strives for continuous improvement and in the last decade Jordan has distinguished itself by modernising, supporting legitimate trade, and becoming the second country to enter into a mutual recognition agreement with the U.S. Customs and Border Protection (CBP) under the WCO SAFE Framework of Standards.