The port landscape in the UK is currently undergoing a radical transformation to secure its position as a trading powerhouse, post our new deal with the EU. As part of this transformation, the Government has announced the creation of a number of Freeports; areas within which the standard customs duties and procedures do not apply. Now whilst the tax breaks and other relaxed customs measures are attractive to industry and big business, they also make freeports an attractive target for the likes of money laundering, tax evasion and counterfeit trading, with the Financial Action Task Force labelling Freeports as a ‘money laundering and terrorist financing threat’.
There is enormous potential for fraud – be that in relation to the flow of people or goods – across any border. This could range from false or double invoicing of goods to disputes concerning who has legal and physical possession of goods at a particular time or geography. Attempts to cross borders without proper authorisation are also widespread. A primary concern in many countries is that criminals could exploit legal openness, geography and interconnectivity (particularly global travel networks) to bypass border authorities and other law enforcement.
One of the main reasons for the attractiveness of Freeports to criminals is that physical boundaries and border surveillance do not provide sufficient protection to prevent the crimes described above.
This is due to a number of factors including:
• Unsecure and hard to trace information chains from origin to final destination
• Unsecure cargo containers and transport vehicles that can be tampered with during transportation
• Complex shipping routes and lack of common data standards that make obfuscation of origin trivial.
To solve these problems, we need to adopt a system that considers the entirety of a components life from point of origin until it leaves the Freeport site, including component manufacture, shipping, and sale, amongst other things. To consider this breadth of journey, the solution to the Freeport security problem clearly lies outside traditional physical security and instead in the realm of digital.
The key to efficient and effective customs and border processes is reliable advance information. With respect to people, advances such as the use of API/PNR data and biometric-enhanced and machine-readable passports help customs and border agencies standardise passenger screening for entry into global travel systems. However, with the wide variance in supply chain and trade finance practices and the lack of digitisation of these processes across many parts of the world, information is not always available. And when it is, it isn’t always reliable. We have opportunities to apply cutting-edge technologies that can further support cargo, trader, and shipment identification, authentication, and risk assessment.
Blockchain and Internet of Things (IoT)
It is the combination of these two technologies that provides the most promising solution to secure the future of the Freeport. Blockchain technology can be summarised as a distributed ledger system that ensures the integrity of a data chain through cryptographic seal. Blockchain technology encompasses three salient elements:
• A peer-to-peer network of ‘nodes’ for conducting transactions without an intermediary
• A data store or append-only database for recording those transactions
• A consensus mechanism for validating the transactions and preventing fraudulent or false transactions.
A blockchain – a chain of previously-validated blocks of transactions – is a permanent, auditable record of successive, validated peer-to-peer transactions that is extremely difficult to falsify, disrupt, or alter. Blockchain technology also provides a platform for applying business logic in order to perform functions such as identity validation and automated smart contract processes.
By combining the physical IoT devices with the digital technology of the blockchain, a logbook can be created for each Freeport-bound component to be stored upon. This logbook would contain time-stamped and geo-tagged information regarding the integrity of the goods to ensure the goods haven’t been tampered with. This will enable the Freeport authority to guarantee what is entering and exiting their boundary and will enable simplified checks at the ports’ boundary.
So how would this work in practice? Motion sensors could be placed in the corners of cargo compartments in soft-sided transit vehicles to monitor any movement after vehicle loading, and detect tampering during transit. For conventional hard-sided cargo containers, smart locks placed on the outside of containers would ensure that only authorised personnel could access the goods inside as well as ensuring that any tampering of the lock is recorded in the containers blockchain logbook. Paired with these sensors, location beacons monitor the position of inbound goods to a Freeport, allowing for real-time arrival data to feed border control for efficient entry and to alert customs of any deviations to a goods vehicle’s nominal journey.
Smart contracts and other aspects of blockchain and distributed ledger technology could also help automate current processes for review and inspection, customer duty collection and related processes.
Whilst the technology highlighted above provides a solid solution to the Freeport security issue, it isn’t feasible for implementation without accompanying legislation overhaul. For smart contracts, it would need to become mandatory for the Freeport supply chain to utilise a mandated logging system to update the status of goods throughout their journey. As well as this, shipping companies must adhere to IoT technology regulations, ensuring that all vehicles transporting Freeport-bound goods are equipped with the appropriate devices to integrate with the logging system. Finally, and perhaps most importantly, originators of Freeport-bound goods must be accredited to ensure the integrity of goods at point of origin. If this legislative step is missing then no matter how secure the supply chain is, it is wide open at one end for misuse. For scenarios where trust between parties is minimal, smart contracts allow for joint asset control. Meanwhile, the integrity of public blockchains comes much closer to solving a lack of trust than any other previous technology.
While blockchain technology can also advance both the efficiency and the effectiveness of customer and trade enforcement, government must have the ability to interact with blockchain enabled trade finance platforms and supply chain to realise benefits fully.
More widely, this interaction needs to be feasible between the technologies. Moving data is always a challenge, and we need to find a way for data solutions to be able to talk to each other. The combination of technology and governance challenges will continue to make interoperability a challenge.
Not only would this make the movement of goods through Freeports safer and less likely to be tampered with, it is also efficient. The confidence afforded by the IoT/Blockchain system allows Freeport authorities to reduce checks performed on goods, therefore decreasing the cost, hassle and ‘dead time’ for the suppliers. The process also allows for security checks to be performed away from the Freeport site, unlocking further benefits to efficiency.
Similarly, with blockchain-based digitised global trade information, customs and border agencies could:
• Speed invoice and bill of lading reviews
• More effectively target inspections to only those items of most concern
• Widen the use of blockchain-based trade to other UK programmes in need. The creation of fast lane programme could incentivise adoption.
However, to realise these benefits, blockchain and distributed ledger technology must continue to mature, and challenges in governance, standards, and interoperability must be addressed.
If we can make the above system a reality, we could realise massive benefits in the port security space. To me, it’s a no-brainer. To ensure the UKs position as a global manufacturing power is maintained there is a requirement to utilise schemes such as Freeports, and without a system such as that described above, there can be no Freeports.
By Alexandros Loumpos, Principal Consultant – Change Management at Atkins and Calum MacInnes, Assistant Manager – Technology Strategy and Transformation at KPMG UK