Officials of a mobile Customs squad positioned on Peshawar’s Jamrud Road halt every second vehicle heading towards the city. They are on the look out for goods being ‘smuggled’ from Karkhano Market. “We are here to prevent that smuggling,” a member of the squad tells the Herald.

The market, though located within Peshawar, has the unique advantage of occupying a site right where the city’s limits end and the tribal area begins. It is known for trading in goods smuggled from Afghanistan for sale in many cities and towns across Pakistan.

Only four kilometres from the Model Customs Collectorate, the government agency primarily responsible for countering smuggling, Karkhano Market is distinctive from other commercial areas in Peshawar in the sense that hardly any Pakistani laws and taxes apply here. Just across the road from it is the entirely different world of Hayatabad Industrial Estate where goods manufactured, imported or exported are all subject to official taxes and duties.

Consisting of only a few shops in the mid-1980s, the market has now grown into a complex of as many as 5,500 shops and warehouses that mostly handle goods illegally brought from Afghanistan mainly under the garb of the Afghan transit trade. A recent inquiry report by Dr Shoaib Suddle, the Federal Tax Ombudsman (FTO) into the large-scale smuggling under this transit trade has brought to light the fact as to how Karkhano Market, and other commercial centres like it, are playing a central role in the entire operation.

The FTO’s inquiry has its origin in a Supreme Court suo motu notice on the media reports that 11,000 containers with goods meant for foreign forces stationed in Afghanistan had gone missing within Pakistan. But when the FTO started probing, he found out that it was the transit trade, rather than supplies for foreign forces, that smugglers and pilferers were exploiting to the loss of tax revenue – running in hundreds of billions of rupees – for Pakistan.

The FTO has based his findings on the data provided by the Pakistan Revenue Automation Limited (Pral), a subsidiary of the Federal Board of Revenue (FBR) that maintains a record of all the transit goods landing at the Karachi port and passing through Pakistan for onward transportation to Afghanistan. He has also estimated – based on interviews with transporters – that eight days “is reasonable time for a return journey [for a goods container] from Karachi to Amangarh (on the Pak-Afghan border near Peshawar) and Karachi to Chaman.” Analysing the data under this estimate, he has reported that at least 7,922 containers carrying the transit goods have made the round trip between Karachi and either of the two border posts in less than eight days during the period between January 1, 2007 and October 15, 2010.

Calling these as missing containers, he suggests that they actually never reached their destination, unloading their contents somewhere in between for the benefit of traders who run businesses in Karkhano Market-like commercial sites. A large proportion of them may not have even left Karachi, the report says.

A four-member committee that the FBR has set up to verify or reject the FTO report has come up with an even bigger figure after trawling through the Pral record. The number of containers carrying the transit trade goods which made the roundtrip in less than eight days, according the committee’s findings stands at 13,836.

The Pral data further shows that Karachi Customs handled as many as 306,267 transit goods containers in the 46 months between 2007 and 2010. When the FTO crunched these figures, he found out discrepancies on a mass scale. There is no information available on 71,202 containers if they ever left Karachi and reached the border post; 55,140 containers are recorded as having left Karachi but having failed to reach the border posts; and another 27,871 surprisingly reached the border posts without there being any record of their departure from Karachi. The FTO does not classify all these containers as missing but points out that these discrepancies highlight weaknesses in the system that records and reports the movement of the transit containers through Pakistan – exposing the entire transit trade to exploitation by smugglers and corrupt officials.

The chief executive officer of Pral, in response to the FTO’s queries, does not question the broad conclusions that the FTO inquiry report has arrived at but he points out that the data about the transit trade containers is entered manually as and when the documents about their movement become available and, therefore, it does not reflect the real time that a container takes to make a round trip. But the Pral officials concede that their system of record keeping is inadequate because they do not have the required infrastructure to handle the massive volume of the Afghan transit trade. This problem is compounded by the lack of security at the Pak-Afghan border, they add. It is, however, surprising how even at its Karachi terminal – considered to be the most sophisticated in terms of equipment and human resources – Pral has failed to record tens of thousands of transit trade containers.

An FBR source familiar with cross-border trade and investigations into the missing containers says his department has carried out a massive reshuffling of its senior officials after the FTO submitted his report to the Supreme Court, suspending at least six deputy collectors and over a dozen appraisers across Pakistan.

But he also contests the FTO’s findings on several grounds, terming them “an exercise based merely on presumptions”. Citing an investigation conducted by the National Accountability Bureau (NAB) in 2004, he claims that trucks carrying goods or fuel to Afghanistan can return in much less time than eight days. “The NAB hired two oil tankers each carrying 15,000 litres of petrol and dispatched them from Karachi and Multan to see how long it takes them to make a round trip from these two destinations to posts on the Afghan border. To the surprise of the NAB investigating team, both tankers reached Spin Boldak in Afghanistan within 22-24 hours,” he tells the Herald.

The differences over whether a truck can make the required round trip in less than eight days, however, sound like an academic exercise in the presence of massive evidence that Afghan transit trade is perhaps the biggest source of smuggled goods into Pakistan. The FTO estimates that goods worth more than five billion dollars are smuggled into Pakistan annually from Afghanistan, the United Arab Emirates, Iran, China and India – with almost 75 per cent of them making their way into Pakistan from Afghanistan. And this does not include massive pilferage of the transit goods during their movement through Pakistan which the authorities do not regard as smuggling because it is defined as the illegal movement of goods across international borders.

The FTO report provides great details about how transit trade goods are smuggled. After the trucks carrying these goods cross the border into Afghanistan they offload their wares which are then carried back to warehouses along the border inside the Pakistani territory. An FBR spokesperson, in her response to a Herald questionnaire, confirms: “The goods return to major markets [in Pakistan due to] lax enforcement and collusion of border security agencies.”

People involved in this illegal trade tell the Herald that goods find their way into Pakistani markets using more than a single method and route. In one of these methods and routes, trucks carrying the transit trade goods duly cross the border into Afghanistan, pay their taxes and duties to Afghan authorities and then take a U-turn back into Pakistan with the connivance of border and Customs officials. Bringing a loaded container back into Pakistan through Torkham border post on Peshawar-Kabul route “may require 250,000-280,000 rupees in bribes paid at the border,” says a trader in Karkhano Market on the condition of anonymity.

The other route starts from Shilman area inside Afghanistan where transit trade goods are unloaded and then taken back into Pakistan either on trucks and vans using a land route or on boats using the Kabul river. These goods end up either in Jamrud tehsil or Landi Kotal tehsil of Khyber tribal agency situated right next to Peshawar.

Until 2009, a third route was also being used, with goods coming to Pakistan on camel back from Gorko, a border town in Afghanistan’s Nangarhar province, and landing in Landi Kotal tehsil. Sources say there were about 200 warehouses in Landi Kotal to store the smuggled goods. This route is no longer functional because of the security situation in the area.

Many traders in Karkhano Markets, however, argue that the volume of Afghan transit goods pilfered inside Pakistan while on their way to Afghanistan is much higher than that of those smuggled back into the country from across the border. The FTO’s findings on missing containers also seem to support this claim. The fact that there are markets selling Afghan trade goods even in Lahore and Karachi means that they get the stuff they sell from the transit trade containers while they are still in Pakistan, says a Peshawar-based trader who also runs a business concern in Lahore’s Shah Alami Bazaar.

But the FBR denies that transit goods are pilfered before they reach the border. “The contention of traders that 75 per cent of their stuff comes from down country … is totally contrary to the facts as each container or railway wagon loaded with transit goods is duly sealed at the ports of entry at Karachi and the seals affixed on them are found intact on arrival at transit stations,” an FBR spokesman tells the Herald in a written response. The FTO, however, backs the anecdotal evidence by saying that “thousands of containers carrying high-tariff transit goods…are pilfered within Pakistan.”

A senior FBR officer also acknowledges the fact that pilferage exists but he blames it on the flawed handling of road transportation of the transit goods by the National Logistics Cell (NLC) – a subsidiary of the Pakistan Army. According to the Afghan transit trade agreement, the cell has exclusive rights to transport transit trade goods to Afghanistan through road network. “But it has contracted out the operation to private carriers who have further sublet it to even smaller transport companies,” says the FBR official. “The NLC had made it a business,” he remarks. It has issued clearance certificates to goods carriers without keeping a check on them.” In many cases, the source says, these private transporters do not have modern tracking facilities to keep an eye on the movement of their containers and thereby ensure their passage across the border. While compiling his report, the FTO contacted the NLC asking it to provide him data on the containers carrying transit trade goods but he received no response. The FBR also contacted the NLC to explain its position on pilferage of containers but the board’s probe committee in its initial report, submitted to the Supreme Court, said “the responses and detailed container-wise data are yet to be received from NLC.”

There are also clear signs that the smuggling and pilferage do not happen with the connivance of the Pakistani officials only. The FBR inquiry committee has consulted the Afghan authorities to see whether they have any complaints about missing containers. “Afghan trade commissioners both in Peshawar and Chaman have testified before the committee that all the commercial transit cargos have crossed the border and they do not have any complaints,” the FBR source tells the Herald.

Observers say high tariffs on legal imports into Pakistan is the major reason for the growing volume of smuggled and pilfered goods from the Afghan transit trade, a fact also highlighted by the FTO report. “About 234 items that carry high import duties in Pakistan are prone to smuggling and pilferage,” says Mohammad Ishaq, a former vice president of the Sarhad Chamber of Commerce and Industry (SCCI). He cites the example of heat-sealable films, used in cigarette manufacturing and carry 40-45 per cent duties if legally imported to Pakistan. But Afghanistan levies only five per cent duty on these films. “Consequently, more than 50,000 tonnes of these films are smuggled into Pakistan every month,” Ishaq claims.

He says smuggling and pilferage from Afghan transit trade has become a major source of industrial raw materials such as stainless steel sheets, printing ink, artificial leather and chemicals. Other items that carry high import duties in Pakistan but are subject to low import tariff in Afghanistan – and, therefore, are smuggled in and pilfered – include vehicles, auto parts, cigarettes, tea, tyres, ball bearings, crockery, diapers, air conditioners, printing plates, fabrics, mobile chargers, batteries, DVD players, LCD televisions and perfumes.

Haji Noor Mohammad, a Peshawar-based trader dealing in transit trade goods, tells the Herald that a reduction in import duties is the only way to counter smuggling and pilferage. “Back in 2005 the FBR reduced the duties and within months the volume of smuggling from transit trade dropped drastically,” he claims.

A senior FBR official tells the Herald that Pakistan and Afghanistan had discussed a proposal in 2010 for tariff equalisation but it was opposed by the Afghan side. He also explains that there is no quantitative assessment available as to how much goods does Afghanistan actually need for its own population. Importers, therefore, are free to bring in whatever quantity of goods they want, he says. “Nobody is analysing whether Afghanistan needs 20 million blankets [every year], which mainly end up in Peshawar’s Karkhano Market or in similar markets in southern parts of the country,” says Ishaq. According to the FTO report, per capita imports in Afghanistan are 72 per cent higher than those in Pakistan despite the fact that per capita income in Afghanistan is almost one-third of that in Pakistan. “This indicates that Afghanistan imports goods are far in excess of its legitimate requirements,” says the FTO.

The FBR seems to agree that it is incapable of stemming the smuggling because its route lies in the tribal areas which are outside the board’s purview. The Customs cannot operate in the tribal areas and as a result “anti-smuggling powers under the Customs Act, 1969 have been entrusted to the officers of the Frontier Corps and the political administration,” says the board’s spokesperson. She, however, says the Directorate of Customs Intelligence and Investigation are being told to accelerate their efforts to counter smuggling in the settled districts of the country.

This begs the question why the FBR allows commercial hubs like Karkhano Market to not just exist but thrive despite being aware of the illegal nature of the business there. The FBR spokesperson concedes that these markets are illegal but they “cannot be raided by Customs due to lack of resources and reluctance on the part of police and the local administration on the plea that they want to avoid disturbing the law and order situation.”

But the FBR’s own probe committee “painfully observed” that there were serious violations of rules and regulations on the part of the FBR and “negligence, inefficiency and voluntary blindness by the senior management” that contribute to the smuggling and pilferage of the transit trade goods. The board is also scrutinising the assets of the officials suspected of having abetted these illegal activities.

The lack of political will is another major factor. A senior officer of the Collectorate of Customs Peshawar tells the Herald that the government does not have the will to take action against places like Karkhano Market. He mentions the fruitless efforts the FBR has made in the past to regulate them. During the government of General (retd) Pervez Musharraf, he recalls, there was a proposal to levy an annual shutter tax of 40,000 rupees per shop for which survey teams also visited these markets. But the subsequent strikes by the shopkeepers forced the government to abandon the proposal, he adds. The Khyber Pakhtunkhwa government has been unable to even collect property tax from these markets, concedes a senior official at the provincial excise and taxation department.

The FTO points at this complex web of government departments and officials looking the other way while Afghan transit trade continues to grow as a multi-billion dollar illegal operation. He says it is the work of organised syndicates which have their roots inside the government. “Billions [of rupees] of revenue have been evaded due to the connivance and corruption of the concerned officials.” In Ishaq’s precise and apt description, “smuggling and the Afghan transit trade are synonymous.”