Crmcar1 module 2 by Ceddet

CUSTOMS RISK MANAGEMENT. CARIBBEAN

MODULE 2

MANAGING THE MAIN RISKS AT BORDERS

Customs Risk Management

Module 2

Course author Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector (INT). Course coordinator Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector (INT), the Institute for the Integration of Latin America and the Caribbean (INTAL) (www.iadb.org/en/intal) and the Inter-American Institute for Economic and Social Development (INDES) (www.indes.org). Module author for the Latin-American region Inmaculada Martínez de Guereñu Gómez de Segura. Risk Management Expert. Module author for the Caribbean region Ivan Peterson. Pedagogical and editorial coordination The Inter-American Institute for Economic and Social Development (INDES) (www.indes.org) in collaboration with CEDDET Foundation (Economic and Technological Development Distance Learning Centre Foundation) (www.ceddet.org).

Copyright © 2017 Inter-American Development Bank. This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB’s name for any purpose other than for attribution, and the use of IDB’s logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license. Note that link provided above includes additional terms and conditions of the license. The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.

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Table of Contents List of Tables.................................................................................................................... 4 List of Figures .................................................................................................................. 4 Glossary ........................................................................................................................... 5 Module Introduction ....................................................................................................... 6 General Objectives of the Module.................................................................................. 7 Learning-Oriented Questions ......................................................................................... 7 UNIT I. AUTHORITIES WITH BORDER MANAGEMENT POWERS ................................. 8 Learning Objectives ........................................................................................................ 8 I.1. Different Border Authorities ..................................................................................... 8 I.2. Coordination Between Border Authorities ............................................................ 10 SYNTHESIS OF THE UNIT ...............................................................................................14 UNIT II. TYPES OF BORDER RISKS ................................................................................. 15 Learning Objectives ....................................................................................................... 15 II.1. Fiscal Threats ........................................................................................................... 15 II.2. Non-fiscal Risks ....................................................................................................... 18 II.3. Assessing Risk and Customs Controls ................................................................... 20 SYNTHESIS OF THE UNIT .............................................................................................. 24 UNIT III. SPECIAL NOTE ON SECURITY RISKS: THE SAFE REGULATORY FRAMEWORK ................................................................................................................ 25 Learning Objectives ...................................................................................................... 25 III.1. Facilitation and Control ......................................................................................... 25 III.2. Establishing Collaboration, Cooperation and Coordination Systems with National and International Intelligence Services ................................................ 27 III.2.1. Coordination with National Intelligence Services.................................... 28 3

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III.2.2. Coordination with International Intelligence Services............................ 28 III.3. Mutual Recognition of Controls ........................................................................... 30 SYNTHESIS OF THE UNIT ............................................................................................... 31 UNIT IV. CONTROL AND COMPLIANCE MOTIVATION ................................................ 32 Learning Objectives ...................................................................................................... 32 IV.1. Operator Information and Assistance System ..................................................... 32 IV.2. Simplified Procedures ........................................................................................... 33 IV.3. Traceability of Entry / Exit Flows .......................................................................... 34 IV.4. Benefits for Operators .......................................................................................... 35 IV.5. Classification of Operators ................................................................................... 35 IV.6. Punitive Systems ................................................................................................... 37 SYNTHESIS OF THE UNIT .............................................................................................. 39

Complementary Material .............................................................................................. 40 Bibliography .................................................................................................................. 40

List of Tables Table 1. Types of risks .................................................................................................... 20 Table 2. Threat/Risk levels ............................................................................................. 21 Table 3. Model for law enforcement management .................................................... 37

List of Figures Figure 1. Location of border enforcement authorities at the port of Antwerp (Belgium) .................................................................................................... 13

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Glossary n WCO: World Customs Organization. n ENS: Entry Summary Declaration. n AEAT: State Tax Administration Agency, Spain. n SSTL: Smart and Secure Trade Lane. n AEO: Authorized Economic Operator. n C-TPAT: Customs-Trade Partnership Against Terrorism. n FAQ: Frequently Asked Questions.

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Module Introduction The dramatic increase in the global movement of goods and passengers propelled by new commercial procedures that allow for smoother and more dynamic transactions has prompted Customs and other agencies with border enforcement responsibilities to adopt measures for protecting citizens while still facilitating and promoting legitimate trade. However, the natural evolution of international trade and the terrorist attacks of September 11, 2001 have given rise to new threats that have forced customs administrations to adapt their structures and roles, expanding their initial duty-collection role to other areas such as security, intellectual properties, the environment, etc. Managing such a wide range of threats or risks requires coordination with other authorities, both national and foreign, in order to achieve synergies and economies of scale. The attacks of September 11 have pushed the need for increased security coordination to a whole new level. The role of the WCOâ&#x20AC;&#x2122;s SAFE framework has become integral in ensuring that the complementary goals of maintaining security and facilitation remain the collective goals of like-minded organizations. As the module progresses, we will see that scarce human, financial, and material resources available are forcing administrations to be selective and seek the collaboration and cooperation of operators in order to: n Facilitate voluntary compliance of importers / exporters. n Set up dynamic and secure supply chains.

Achieving this dual goal involves changing control procedures, adapting them to transition from a system that oversees each individual operation to a system that classifies operators according to their degree of reliability. Control for known operators may consist primarily of pre-entry audits with periodic post-entry reviews, leaving border inspections to those operators that seem less reliable or are unknown to the administration.

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Although the Revised Kyoto Convention recognizes risk management as a modernizing element for customs, the Bali Ministerial Decision of December 2013—article 7, section 4 of the annex on trade facilitation agreements—reaffirms the importance of risk management as a crucial component of goods control.

General Objectives of the Module n Identify the types of risk facing customs authorities, especially those related

to security, as well as the right moment to carry out control activities. n Identify the different authorities with border control powers and possible

coordination solutions to minimize their impact on customs procedures and formalities. n Understand cooperation arrangements—both with operators and other na-

tional or international agencies—that promote voluntary compliance with customs obligations and differentiate visible and recognizable supply chains from unknown or less reliable operators.

Learning-Oriented Questions n What kind of threats should customs manage in the twenty-first century? n

Do all threats detected affect all customs organizations in the same manner?

Should different authorities with border enforcement responsibilities act independently from the rest?

Are there any benefits in fostering collaboration among different administrations?

n Does the establishment of communication channels between economic op-

erators and customs administrations have a positive impact on risk management?

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UNIT I AUTHORITIES WITH BORDER MANAGEMENT POWERS

Learning Objectives At the end of this unit, participants will be able to distinguish between the different authorities of border enforcement organizations that may assist in the facilitation of customs procedures without reducing control levels.

I.1. Different Border Authorities The laws applicable to the cross-border movement of goods and passengers span a large number of issues, from health and sanitation to industrial and intellectual property to national security. Authorities with border management obligations must therefore ensure compliance with the legislation. Given the vast array of different issues and regardless of the particular organizational arrangements of each country, the responsibility for enforcing these laws falls on the shoulders of various government agencies and includes the performance of control operations on the goods themselves and/or their accompanying documents. As discussed in module 1, the role of customs may vary from country to country depending on their organizational structure and the distribution of powers. However, 8

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all organizations must establish a minimum degree of coordination with other administrations to ensure secure and expeditious transboundary traffic. National authorities that share border enforcement duties with customs are generally responsible for the following areas: n Animal health. n Plant health. n Environmental protection. n Protected species (CITES). n Hazardous goods. n Precursors of drugs / Narcotics. n Precursors of explosives. n Quotas. n Allowances. n Prohibitions and restrictions. n Protection measures for certain sectors. n Market surveillance (product safety and security).

Dealing with such diverse matters calls for the participation of multiple agencies that are usually embedded in different ministries. This will surely hamper any coordination efforts if no high-level national strategy is implemented to regulate these agenciesâ&#x20AC;&#x2122; operations. However, it is the responsibility of customs authorities to verify that the relevant agencies have issued a permit, license or certificate authorizing the entry of the goods listed in the customs declaration. Similarly, customs authorities must check for incorrect declarations, voluntarily or involuntarily lodged, to prevent the introduction into the territory of goods that have been wrongly classified, thus relieving other border agencies from carrying out controls.

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I.2. Coordination Between Border Authorities As discussed above, there are several border management agencies charged with the mission of enforcing the current legislation and with the authority to execute controls prior to declaring the goods as cleared for importation into the national territory. Ensuring efficient operations with so many agencies requires implementing coordination and cooperation mechanisms between them to avoid any unnecessary delays and costs resulting from lodging the same documents time and again at different â&#x20AC;&#x153;windowsâ&#x20AC;? and undergoing multiple controls over the same merchandise at different moments and at different locations. In an increasingly competitive environment with highly adjusted supply chains, border controls cannot constitute an obstacle to trade. Solutions need to be found to avoid unjustified delays and excessive costs. Coordinating procedures among the various authorities with border responsibilities increases the quality of the information available and the efficiency of risk management measures. The results will be positive not only for operators, who will benefit from simplified border formalities, but also for administrations, which will improve their risk management capabilities by having more and better information at their disposal. Indeed, this added value will vary depending on the type of cooperation and coordination arrangements established among the various administrations involved in the process. The effectiveness of solutions implemented depend on the different levels of integration and cooperation. However, an ideal situation would be to institute a comprehensive single window model, as described in the Bali Ministerial Declaration of December 2013, article 10, section 4 of the annex on trade facilitation agreements.

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The following solutions may help to simplify border-related formalities and expedite the release of the goods presented to customs authorities. They all fall under the mandate of cooperation included in article 8 of the annex on trade facilitation agreements of the Bali Declaration: n Issuing electronically numbered certificates or licenses:

As stated above, customs authorities must verify that the goods included in the relevant customs declaration are backed by the corresponding certificate or license issued by the competent authority. Each certificate has a number that must be included in the declaration. The lack of an effective communications system between the customs authority and the relevant agency may result in the latter performing arbitrary document verifications to confirm the authenticity of the certificate attached to the declaration. As global trade is quickly embracing an electronic administration system, paper-based controls become totally senseless and should be replaced by automated controls or validations that prevent unnecessary delays. One possibility is to issue electronic certificates or licenses identified by a number or code that customs authorities can successfully validate against a common repository where the key customs and license data associated to that number or code are stored (people, goods, weight, etc.). n Developing web-based services among the different agencies and customs

authorities: The implementation of web services constitutes one step further, as it establishes an online communication link between Customs and the other government agency. This allows Customs to inquire about the certificate number specified in the customs declaration to validate its veracity and the consistency of the data contained in the customs declaration and the certificate. Previous systems also sought to reduce the number of document controls performed by the customs authority, but they did little to solve the issues of repetitive controls and bureaucratic formalities with different agencies.

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n Establishing a coordinated inspection model:

In a coordinated inspection model, the objective is to limit the number of physical inspections of a consignment included in a customs declaration to one, so that all agencies concerned coordinate their efforts to complete the inspection at the same time. Such a solution requires the existence of a communications system among all agencies concerned allowing them to inform each other of their intention to conduct a physical control as soon as the customs declaration is lodged. A system will need to be established to determine the when and where of the inspection, depending on the specific agency that decides to perform the control. For example, let us imagine a situation in which the agency in charge of veterinary controls suspects a potential risk of pest introduction and the customs authority has doubts about the declared customs value. Both entities announce their intention to perform a control operation but in this case, the veterinary control agency will take precedence over Customs to determine both the best place for the inspection and the way to proceed when opening the container. The following figure shows how the establishment of common facilities for performing agency-specific controls helps to coordinate efforts and simplify control procedures.

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Figure 1. Location of border enforcement authorities at the port of Antwerp (Belgium)

Source: Antwerp Customs, Belgium. 2015

n Single window:

The â&#x20AC;&#x153;single windowâ&#x20AC;? system represents an information integration system: the operator completes all border-related formalities with the relevant agencies at the same point of entry and lodges all documents required to obtain the certificate only once. For its proper operation, such a system necessitates either a document repository or a computer application that sends the documents directly to the requesting agency. It must also include provisions allowing operators to place their consignment at one location for all controls to be performed there. With regard to the risk management procedures conducted to select which shipments are to be controlled, a differentiated risk engine can be implemented or a system for managing risk collectively, although this will demand high levels of security and confidentiality among all the concerned agencies. The single window procedure may be initiated with only some of the agencies with border enforcement duties and gradually expanded to other entities. Module 1 described the case of Spanish customs, where the single window scheme was first set up for ports and customs and later on applied in other agencies.

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Finally, it should be remembered that customs authorities play a dual role with regard to other agencies with border control duties. On the one hand, it must verify the certificates or licenses that accompany the corresponding customs declarations are consistent with the data declared and, on the other, confirm that the goods declared do not require authorizations from other competent agencies. For this second function, the history of rejections by other agencies becomes relevant, as it provides an indication of potential future evasion by modifying the data that caused the rejection. It is also important that agencies send warnings, such as sanitary threats, in order for Customs to be prepared to manage them.

SYNTHESIS OF THE UNIT In this unit we have presented the various matters that fall under the extensive legislation of border control, whose compliance is safeguarded by different competent agencies, including Customs. The large number of agencies requires the enactment of simplified solutions that do not block or hamper border formalities, thus saving time and additional costs. Inter-institutional coordination provides an opportunity for obtaining and sharing data, which is essential for optimal risk management. This unit refers to a number of solutions with varying degrees of integration. However, the ultimate goal must be to establish a single window system in line with the recommendations contained in the Bali Ministerial Declaration.

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UNIT II TYPES OF BORDER RISKS

Learning Objectives n At the end of this unit, participants will be able to identify the different types

of threats customs authorities are faced with in fulfilling their duties of surveillance and control. n Also, participants will be able to recognize the different moments when risk

analysis and threat controls will be performed, considering the type of risk identified for decision-making purposes.

II.1. Fiscal Threats The existence of customs administrations is justified from a dual perspective: to control and facilitate trade, and to obtain financial resources for the national exchequer. In the past, the lack of an internal taxation system that secured the resources needed to run the State made applying taxes to imports, exports or transiting goods an easy way to obtain those funds. Accordingly, establishing high tariffs on the international trading of goods quickly became one of the main sources of income for most countries and for many years. In this context, customs focused their efforts on collecting those taxes and fighting against smugglers who devised ingenious ways to avoid paying those monies. As time went by, and despite the fact that tariffs have

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decreased thanks to the pressure of international agreements, customs have retained their duty-collection function, which is still threatened on many fronts that must be tackled from an adequate risk management perspective. Also, customs need to cooperate with different control agencies to mitigate other parafiscal risks (sanitary, phytosanitary, intellectual and industrial property, security, etc.). Some customs organizations have placed a high priority on ensuring that the goods entering in the passenger or commercial importation streams are properly classified and that all relevant duties, taxes and other fees are paid. Some of the considerations in establishing that appropriate revenue is collected are as follows: a. Customs value: Understating the value of the goods is the main problem for determining the true customs value of an item. In the case of “ad valorem” tariffs, the declared value will be the basis for calculating the customs duties charged on a particular item. b. Volume of imported goods: Much like the customs value, declaring a volume of merchandise lower than the actual volume has a direct impact on the specific tariffs to be paid, which are determined by applying a fixed amount for each unit of volume. As in the case of “ad valorem” tariffs, declaring a smaller volume will affect the value of the duties collected. c. Origin: The origin of the goods will determine the application of specific tariffs, as the type of tariff established for a certain statistical position can receive tariff benefits that result in the reduction or even the elimination of the tariff, as well as higher tariffs like the so-called anti-dumping duties that seek to offset unfair competition from certain territories. Therefore, determining the true origin of the goods constitutes one of the main tasks for customs authorities. d. Classification of the goods: As explained above, there is no single general tariff for all the goods imported. Instead, tariffs will vary depending on their classification and origin. The reason

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for this variability lies in the efforts to protect domestic producers (in the European Union, the textile and shoe industries are clear examples) and to facilitate the importation of goods considered strategic because they are not produced locally (like oil imports in the European Union). Classifying goods in one category or another may result in the application of higher or lower tariffs, so customs have the important task of classifying goods correctly. e. Import flow: It should be remembered that imports are the first link in a chain that ends with the sale of the goods to consumers. Therefore, inaccurately declaring the value of goods, quantity, classification, origin, etc., of the goods imported may open the door to black market practices that may erode the national exchequer due to the failure to collect appropriate revenues. f. Export flow: Although the focus has traditionally been placed on import flows, there are fiscal threats that exist in the export flow as well. For example, goods that have been imported may subsequently be exported. There are a number of legitimate reasons why this may happen. The imported goods might not have been the correct items required, they might have been damaged on arrival or a number of other bona fide reasons to export them. Many customs organizations provide a refund of the import duties collected when cargo is subsequently exported. The fiscal threat that exists in this case is that the value or quantity of the goods being exported can be exaggerated by the exporter to receive a refund that exceeds the amount of duties and taxes initially paid upon export. Other classification factors, such as rules of origin, can also be altered upon export of goods in order to fraudulently obtain more of a refund than should be allowed.

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As the export flow of goods represents the potential for some fiscal risks, border management organizations may allocate resources to verifying the truthfulness of export declarations. Finally, it should be noted that some countries establish duty deferral programs such as bonded warehouses or free zones. Often, these warehouses and zones are set up in order to facilitate cargo that is intended to be re-exported at some point in the future and not to be entered into the domestic market. One example of a bonded warehouse that is quite well known is a â&#x20AC;&#x153;duty free storeâ&#x20AC;? that one would find at an international airport. In this case, goods are allowed to be imported without the collection of duties or taxes as long as they proceed to a bonded warehouse and are directly exported. In this case, a fiscal threat exists where goods destined for a bonded warehouse or free trade zone are diverted and entered into the domestic market without the collection of appropriate revenues. Where bonded warehouses and duty free zones are established, there should be good controls in place to ensure that fiscal threats are mitigated. Although several fiscal threats have been provided, there are many others that exist. For this reason, customs organizations should undertake fiscal threat reviews to identify where these risks exist. Once identified, a robust system of interdicting the appropriate passengers or shipments should be implemented.

II.2. Non-fiscal Risks Despite their origins as duty-collection agents, customs administrations have expanded their competence and diversified their role in response to a legislation that has evolved to address new citizen needs or demands for control mechanisms that defend them from external dangers threatening their welfare and integrity. Thus, customs have taken on responsibilities regarding health, security, protection, and environmental controls, among others, in collaboration with other government agencies.

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As mentioned before, the competence to ascertain compliance with these requirements is not exclusive to Customs, but shared with other border enforcement entities. However, Customs is the final controller of the goods kept in its facilities and therefore must verify they are backed by the corresponding certificates and licenses before allowing them to enter or leave the territory, and that operators do not intend to evade controls from other entities by falsifying the declared quantity or value. The following are some non-tax risks that customs authorities must also deal with: n Sanitary and phytosanitary issues. n Security issues to prevent terrorist acts or activities that finance criminal or-

ganizations. n Fight against smuggling, especially drugs, weapons and tobacco. n Control of drug and explosive precursors. n Commercial licenses, both for exporting and importing certain products. n Cultural heritage. n Defense and dual-use materials. n Homologations for trading products in the domestic market. n Protection of intellectual and industrial rights. n Environmental protection (Washington Convention on Protected Species,

the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, prohibition of products that destroy the ozone layer, etc.). n Prohibitions and restrictions on trade of certain products or with certain

countries. The role and involvement of customs authorities in these issues may vary, ranging from a mere verification that the goods are accompanied with the corresponding authorizations for being traded in the country to the development of a strategy aimed at identifying any risky shipments in order to eliminate or reduce their potential impact.

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The following table contains some examples of fiscal and non-fiscal threats that should be considered by customs organizations. Table 1. Types of risks Fiscal Threats

Non-Fiscal Threats

Valuation / undervaluation

Sanitary and Phytosanitary

Origin

Security / Terrorism

Misclassification

Narcotics

Smuggling / Non-report

Trade of endangered species CITES Defense and Dual-Use Materials IPR Ozone Layer Protection Prohibitions and Restrictions

Quite obviously, these risks do not share the same intensity, for they depend on the geographical location and the type of trade relationships, especially the origin and destination of the goods and the type of goods traded internationally. In this sense, the threats to security will be more serious if traffic concentrates in countries with well-established terrorist organizations than in countries with tighter security levels. Similarly, countries with many islands must pay special attention to prevent the entry of alien pests into their ecosystems.

II.3. Assessing Risk and Customs Controls When managing risks, it is important to assess two main factors that will help determine whether a particular threat should be considered a high priority or a low priority. First, the probability that the threat will occur must be gauged. Determining the prevalence of a threat can be accomplished in a number of waysâ&#x20AC;&#x201D;through the assess-

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ment of historical data, intelligence information, or other more sophisticated predictive analytics. The other factor that should be measured in relation to the probability that a threat will occur, is the impact that will be realized should the threat occur. The following chart demonstrates how many modern customs organizations categorize risk using these two factors. Once this is done, the threat can be determined to be low or high risk. Table 2. Threat/Risk levels

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When resources are scarce, it is through the assessment of risks that customs organizations can determine which threats are tolerable and which ones truly represent a high risk. Of course, resources are moved to identify and interdict those threats that are considered to be the most important (i.e. highest risk). Once threats are identified and risk levels are established, it is necessary to ensure that proper controls are in place to stop the threat at the earliest point in the travel or trade continuum as possible. For example, if Customs received information about a container being loaded onto a ship in a foreign country and that container is deemed to be high risk, the best time and place to control that threat is before the 21

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container is even loaded onto the ship at the foreign port. In this case, it is necessary to ensure that the customs agency has the necessary legislative authorities in place to do this. Pre-entry controls are those conducted before the goods arrive at a customs facility. They may even be performed before the goods leave their point of origin. Pre-entry controls may include: n Controls carried out before the goods are loaded at the point of origin for

shipment to the receiving country. In this case, the customs of importation or destination may analyze the risks involved and request that controls be performed. These controls cannot be carried out by the national authorities requesting the controls and must therefore be conducted by third parties. Two possibilities arise: a) Controls performed by the national customs of the exporting country. In this case, the export authorities are requested to perform a number of controls to allow the goods to be shipped, based on a legal framework mutually recognized by both countries. Risk analysis will consider the information available as well as the risk criteria included in the agreement between these countries. A number of these agreements have been signed between the United States of America and numerous other countries, whereby the goods destined for the United States are inspected at the port of origin by means of non-intrusive methods. Sometimes, and depending on the particular agreement, the United States may place customs officers at the port of origin, who may suggest additional controls over certain US-bound shipments. Another example of administrative collaboration to expedite and facilitate trade is the performance of controls by both the exporting and importing authorities simultaneously. This is the case of a pilot project called Smart and Secure Trading Lane (SSTL) between several ports of the European Union, China and Hong Kong, 22

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whereby the authorities concerned undertake to perform the controls at the time of export. The underlying principle is security, for which purpose the authorities need to exchange information in real time to allow each administration (export and import) to analyze the risks involved based on common criteria. In this manner, if one authority determines that additional controls are warranted, they will be carried out at the point of origin, thus avoiding duplicate controls (by both the sending and receiving countries) and expediting the customs formalities at the customs of destination. b) Controls performed by operators: In this case, and based on the information received prior to shipping at the port of origin, Customs performs a risk analysis procedure that may end up in a request for control by the operator prior to allowing shipment of the goods. This is the case of the European Union Community Customs Code for entry summary declarations (ENS), whereby, in the case of air transport, the operator may be asked to perform an additional scanner control. Certain controls are performed upon arrival of the goods at the customs facilities but prior to lodging the customs declaration to establish their destination. Here, risk analysis will largely depend on the information provided by operators in the cargo manifest or other similar declaration. The risk analyses that may be conducted will depend on the type of data required in the declaration. Concurrent controls are those performed simultaneously with the lodging of the customs declaration, which states the destination of the goods. In this case, authorization to release the goods for their intended destination will depend on the results of the controls conducted. Finally, post-entry controls are those carried out subsequently to the completion of customs formalities, and will take the form of audits on the supporting commercial,

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accounting and fiscal documents held by the operator or a verification of the latterâ&#x20AC;&#x2122;s administrative processes related to customs formalities. When deciding on the right moment to conduct control operations, it should be remembered that risk analysis mat take place at different times, so the same goods may present different types of risks at different times based on the types of threats being analyzed and the data that is available at that time. In general, risk analysis conducted prior to the arrival of a consignment relates primarily to issues of national security and contraband. The main source of information in this case will be the data included in the transportation documents that accompany the goods prior to their shipment. Risk management during the actual reception of the goods will focus on compliance with the legal requirements of the intended destination. In this case financial issues are more relevant, as in post-entry controls. Finally, and depending on the risks involved, national IT software must enable the traceability of the different declarations in order to allow the unification of all controls into a single procedure, thus preventing unnecessary delays and extra costs for the operators involved.

SYNTHESIS OF THE UNIT In this unit, we have reviewed different types of risk that customs authorities must face in performing their everyday duties. Emphasis has been placed on the peculiarities that cause each individual customs administration to be affected differently. We have also introduced the different moments to conduct controls for verifying compliance with shipping regulations.

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UNIT III SPECIAL NOTE ON SECURITY RISKS: THE SAFE REGULATORY FRAMEWORK

Learning Objectives After completing this unit, participants will be able to recognize the growing importance of incorporating national security issues into the risk management procedures implemented by customs authorities. For many administrations, threats to national security are the main concern, prompting their reorganization to ensure greater efficiency in this area. Participants will be able to understand why collaboration and cooperation between the agencies of different countries are pivotal factors in managing security-related risks.

III.1. Facilitation and Control The attacks of September 11, 2001 revealed a new type of threat against national security that had to be dealt with. Many countries reorganized their intelligence services and established new procedures, including customs.

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The purpose was to strengthen security mechanisms without hampering or stopping legitimate trade. Establishing new mechanisms for greater integration or closer collaboration between information services was not enough. It was necessary to rely on more and better information and obtain it earlier than ever before in order to make all elements of the supply chain visible and thus concentrate on unknown or unreliable operators while expediting customs formalities for the rest. Facilitation and control emerged as two sides of the same risk management process. However, increased facilitation should not be interpreted as greater leniency in controls, and vice versa. On the contrary, risk management must aim at facilitating legitimate trade while preventing illegal transactions. This new principle prompted countries and multi-national organizations like the WCO to develop the SAFE Framework of Standards (or SAFE Framework), which enables trade agreements through common regulatory efforts like the Bali Declaration. The SAFE Framework (World Customs Organization, 2005) consists of four core elements: a) Harmonization of the advance electronic cargo information requirements. b) Implementation of a risk management approach to address security levels. c) At the request of the receiving nation, the sending nationâ&#x20AC;&#x2122;s customs administration will perform an outbound inspection of high-risk cargo, preferably using non-intrusive detection equipment. d) The definition of benefits that customs will provide to business that meet minimal supply chain security standards and best practices. These principles require collaboration with the private sector for the promotion of known operators that help in the establishment of secure supply chains. Some examples of collaborative programs are the C-TPAT in the United States; AEO of the European Union and many Latin American countries, AA in China or the program of Japan. Setting up a database of reliable operators who have been previously audited by customs authorities to assess their quality and security standards enables the

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faster processing of goods through Customs and a reduction of risk-targeting controls, thus saving on costs for operators and increasing their competitiveness. Similarly, having reliable chains allows focusing scarce resources on shipments that represent a higher preliminary risk.

III.2. Establishing Collaboration, Cooperation and Coordination Systems with National and International Intelligence Services Promoting secure supply chains in a context of international trade implies the existence of economic operators established in different countries where customs authorities have no control or audit competences to assess their security procedures and standards. Therefore, cooperation and collaboration with other customs administrations and government authorities of the countries concerned is of the essence. Such cooperation and collaboration arrangements require a number of core elements: 1. Promoting known operator programs such as the AEO existing in several Latin American countries and the European Union. 2. Mutual recognition of these programs. 3. Exchange of information. 4. Design of Single Window mechanisms. Implementing these core elements allows customs authorities to rely on quality information for recognizing the reliability of those operators who have been certified in other countries as trustworthy operators. Recognizing known operator programs in different countries requires the exchange of information among national authorities and therefore the creation of effective channels. Such information is critical for risk management systems. Obviously, the information required for managing security risks cannot be limited to authorized operators, but needs to include other sensitive information that may affect the security of a third country. 27

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The use and exchange of sensitive information among intelligence services must be coordinated at both national and international level.

III.2.1. Coordination with National Intelligence Services When it comes to identifying and resolving potential terrorist activity, it is advantageous to work in collaboration with trusted partners. From a national point of view, chances are that the various services possess isolated pieces of information that are all part of the same puzzle. Therefore, sharing these pieces may allow completing the puzzle and acting more collaboratively against organized crime. The schemes used to set up collaboration mechanisms may differ depending on the specific laws and regulations applied in each territory.

III.2.2. Coordination with International Intelligence Services From an international perspective, cooperation fulfills the important role of promoting compliance with regulations and obtaining intelligence information about suspicious entities or individuals. Cooperation is necessarily based on mutual trust. And trust is greatly facilitated by setting up MOUs that regulate the exchange of information on goods and passengers, as well as mutual visits whereby authorities can appreciate first-hand the working procedures of their international counterparts. Once trust has been established, collaboration will be of greater usefulness, as it will allow the exchange of more relevant information. Under the WCO umbrella, the Customs Enforcement Network (CEN) has created a database to share critical information on customs enforcement activities among customs administrations. It is an essential tool to conduct strategic analyses and to identify illicit trend profiles. The shared data provides real-time information on goods and passenger traffic to support customs operations.

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International collaboration can take different forms depending on the specific needs of each administration, although the following stand out: n Communicating results:

A common collaboration mechanism is the creation of online procedures to communicate the positive results of control operations that may help to determine risk profiles for similar types of traffic. Together with the results, it is also important to communicate the detection mechanisms for these new trends. n Working groups:

Establishing working groups that meet on a regular basis allows for the creation of a common front to deal with new threats, trends or tools detected in one country that may also exist in another but have remained undetected. For example, some criminal organizations utilize the so-called Dark Web. For some time, national authorities have been working on obtaining information about the activities promoted through such networks and the people behind them. The experience gained by one authority can be very beneficial for better coordinated response. n Exchange of specific information:

When conducting investigations, it may be necessary to request collaboration from other countriesâ&#x20AC;&#x2122; authorities. This entails the need for contact points to exchange information. These points may be used to supplement existing contact points at regional level. Also, the existence of common databases allows consultation on specific information. Similarly, if national authorities receive sensitive information about a threat in another country, they must communicate it as soon as possible to allow the adoption of the measures required to mitigate or eliminate its impact. In a globalized world where communications and transportation have shortened distances significantly, professional risk management is impossible without the collaboration and cooperation of other national or international authorities, as proposed in 29

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the security strategy promoted by the WCO through the SAFE Framework to secure and facilitate global trade. In particular, standard 1 addresses the exchange of information on high-risk consignments. In an integrated supply chain, customs administrations along the chain must exchange information to facilitate risk management and the release of high-risk consignments. Such an online system may include the exchange of e-mails regarding exports operations, especially the results of the controls performed and the corresponding notice of arrival. The national legislation must contain provisions allowing Customs to send information to other administrations. If the legislation does not include such provisions, efforts to develop and apply them can be considered by the customs organization. The collection and exchange of relevant data may provide a basis to press for such legislation. Also, other WCO tools like the Johannesburg Convention and the bilateral agreement model can serve the purpose of exchanging information on high-risk consignments.

III.3. Mutual Recognition of Controls In this unit we have learned how international cooperation plays a crucial role in the establishment of a modern and effective risk management system. Also, trade facilitation should not be interpreted as a decrease in the importance of controls. On the contrary, the ultimate goal should be toward the mutual recognition of controls, for which purpose a number of conditions need to be set up to solidify trust between the agencies involved. These conditions may be organized into the following categories: n Similar risk management procedures:

As we shall see during the course, the decision to perform control operations is part of a sequential process that must be completed methodically and professionally, with similar standards for all the authorities involved.

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n Similar threat treatment procedures:

In order for controls to be recognized in the receiving country, the risk management procedures of the sending nation must consider the same types of risk as the receiving nation. That is why sometimes the mutual recognition of controls focuses on certain specific issues, as is the case with many Caribbean nations. n Control harmonization:

The mutual recognition of the controls performed requires the parties to â&#x20AC;&#x153;speak the same languageâ&#x20AC;?. Sometimes, the scope of recognition (control of the goods or the enclosed documents) differs slightly, hence the need for guides or manuals that clearly specify the scope and reach of each operation. This is particularly helpful for onsite customs officers and also to avoid misunderstandings between the parties involved. Collaboration to set up similar systems and procedures allows carrying out controls once, thus facilitating trade without compromising security.

SYNTHESIS OF THE UNIT In this unit we have highlighted the need to consider facilitation and control as two components of a process that complement each other. We have also stressed the necessity of establishing collaborative arrangements between different intelligence agencies at both national and international level. Finally, we have underscored the importance of establishing communication and collaboration channels with other countries in order to access information that is relevant for managing risk. As part of the process, it is important that the controls performed at the port of origin be recognized by the authorities of the receiving country.

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UNIT IV CONTROL AND COMPLIANCE MOTIVATION

Learning Objectives At the end of this unit, participants will be able to: n Understand that customs authorities should not concentrate exclusively on

verifying proper compliance by means of controls and sanctions. Instead, a system of communication and training should be implemented in order to incentivize economic operator compliance with customs formalities and to make AEOs aware of the necessity to abide by relevant laws and regulations. n Recognize different solutions adopted at national level to simplify customs

procedures and ensure flow traceability. n Recognize the classification of operators as a valid element to define and

establish risk profiles.

IV.1. Operator Information and Assistance System Any attempts at facilitating compliance with the different customs requirements must begin by establishing a system to allow operators to familiarize themselves with

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applicable rules, a system to communicate inquiries to customs authorities regarding the correct interpretation of the applicable regulations, thus avoiding conflicts that may arise from an erroneous interpretation of the law. In todayâ&#x20AC;&#x2122;s world, information and assistance systems must be based on electronic platforms that should not exclude other additional mechanisms such as telephone calls or written communication. These types of arrangements to promote voluntary compliance with the various obligations are outlined in article 1 of the annex on trade facilitation agreements of the Bali Declaration. A good practice is to include in the Customs service webpage a description of the current relevant legislation, a summary explaining the procedure, the formalities required and the entities subject to compliance, any practical assumptions and a FAQ section with the most common queries from operators and the customs criteria applied. Access to this type of information entails an incentive for economic operators to comply voluntarily with the different customs requirements and gives them a sense that customs authorities are there to help them pursue their economic activities, not to block them. From a risk management perspective, these information and assistance arrangements enhance customs risk management by reducing any risks arising from not knowing the legislation, increasing the number of voluntarily compliant operators, limiting the chances for fraud and maximizing the use of the scarce resources available.

IV.2. Simplified Procedures In line with the above paragraph, the need arises for a simplified set of customs formalities that facilitate compliance with the relevant regulations by lifting any unnecessary administrative burdens. Accordingly, it is important to know which data are

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required by customs to authorize a certain procedure, when the information has to be provided and who is responsible for providing it. Moving toward simplified procedures brings in a new element that encourages operators to comply voluntarily. Also, not overloading operators with complex and unnecessary bureaucratic procedures enhances the image of Customs as a professional public service. The adoption of clear and simple procedures also facilitates the management of risks, as an overly intertwined structure is more likely to encourage fraud. The growing concern for a more secure environment has prompted customs authorities to request information on the goods prior to their arrival. This added obligation for operators may be perceived as a new administrative burden. However, customs authorities should make every effort to highlight the benefits of better risk analysis, which will in turn reduce the need for controls and expedite customs formalities.

IV.3. Traceability of Entry / Exit Flows As mentioned above, establishing and developing systems for tracing entry and exit flows is a key element for managing risk and reducing the number of controls. Entry and exit flows include a number of different formalities that need to be completed sequentially, from the moment the goods enter the territory until they are released to their intended destination. Many countries require that the sending nation submit security-related or regulatory data in connection to the goods, which need to be submitted prior to the arrival of the goods. Once the goods have arrived, the authority may transfer them to a temporary warehouse or customs bonded/sufferance area, issue an authorization for transit, or conduct an importation/re-exportation procedure. All these types of transactions generally follow a sequential order. It is important to ensure that the history of the consignment is made available. The online

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systems implemented in different countries must allow this traceability so that the relevant data can be audited. Similarly, information systems should strive to ensure that all relevant controls can be conducted at the same place and at the same time, i.e. coincidentally with the declaration of importation or transit. Given that each declaration entails different types of threats/risks, having a system that ensures traceability allows the different controls to be concentrated into one single procedure, thus reducing costs for operators.

IV.4. Benefits for Operators As mentioned above, customs authorities should promote the creation of secure supply chains by establishing programs that recognize the status of Known Operators. A known operator must receive certain benefits to incentivize voluntary compliance. Article 7, Section 3 of the Bali Declaration Annex on Trade Facilitation lists a number of advantages related to a reduction of controls and the lightening of administrative and economic burdens. Implementing significant advantages and having them perceived as such by operators provides a great incentive for becoming a known operator and ultimately facilitates control operations by customs authorities.

IV.5. Classification of Operators Setting up a classification of operators based on their history of compliance allows a more precise stratification of risk in the transactions in which they are involved. Making such classification requires the previous determination of the parameters or criteria used to classify operators as reliable or unreliable.

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Customs authorities monitor international transactions involving operators from different parts of the world. This can be of great help for the systematic exchange of information with other countries regarding operators considered reliable based on mutually recognized programs. Classifying operators into different categories according to the level of trust granted by the administration allows focusing efforts on those shipments that pose greater risk, as determined by the status of the operator. According to the customs in the twenty-first century strategy (WCO, 2008), risk management should be considered as a method to achieve client segmentation by risk category. Thus, customs clients can be divided into four broad categories: 1. Those who are voluntary compliant; 2. Those who try to be compliant but do not necessarily always succeed in their endeavors; 3. Those who will avoid complying if possible; 4. Those who deliberately do not comply. Customs in the twenty-first century strategy states that an effective risk-based compliance management strategy acknowledges that the client categories outlined require different responses. Those who voluntarily comply (low risk) are given incentives and simplified procedures; those who try to comply but do not always succeed are given assistance to increase their compliance rate; those who try to avoid compliance whenever possible receive directed compliance; and those who are deliberately non-compliant (high risk) are given enforced compliance.

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Table 3. Model for law enforcement management Low

Risk Level Directed compliance.

High

Client

Voluntary com- Assisted compliance.

Catego-

pliance.

People who try to comply People who will avoid ance.

ries

People who

but do not always succeed. complying if they can. People who deliber-

want to comply.

Enforced compli-

ately do not comply.

Client be- Voluntary com- Attempting to comply.

Resistance to compli-

Criminal intent.

haviors

ance.

Illegal activity.

pliance.

Uninformed clients.

Informed cli-

Will avoid if possible.

ents. Source: WCO Customs Risk Management Compendium - 2010

This is a new approach that departs from the traditional risk management perspective based on individual transaction control toward a control or risk analysis that focusses on operators. Categorizing operators involved in international transactions implies that controls will be selected based primarily on the level of trust granted to each particular operator. Thus, controls over highly trusted operators will be reduced and may take the form of pre-entry audits and post-entry inspections, regardless of specific concurrent controls that may be conducted based on random selection. This will result in faster processing and big gains in time and competitiveness. On the other hand, operators with a lower reliability rating will require onsite controls, thus slowing the completion of customs formalities.

IV.6. Punitive Systems During the unit we have discussed the need to incentivize operators to voluntarily comply with customs obligations and to participate in known economic operator programs that will allow authorities to obtain quality information and enhance the visibility of the different supply chain components. Voluntary compliance and participation in those programs must be fully assessed, with their positive and negative sides. From a positive perspective, we have mentioned the existence of incentives and benefits. Compliant economic operators must understand that fraud does not 37

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pay. Engaging in fraudulent practices involves an element of unfair competition, as fully compliant operators will be subject to higher taxes and therefore their margins will be lower than those of non-compliant operators. Eventually, this may push compliant operators out of the market, leading them to believe that compliance goes against their interests. However, this perception must be reversed, with authorities intervening at two levels: first, by swiftly detecting fraudulent practices and, second, by establishing a punitive system that strongly discourages such practices and bans non-compliant operators from the market. The proposed punitive system must include sanctions at different levels: n Financial penalties; n Denial or cancellation of the permit to operate in the market; n Imprisonment; and n Establishment of a system of responsibilities that extends sanctions to all

individuals directly or indirectly involved in a case of fraud. Similarly, frontline risk management officers must have the feeling that their job identifying and fighting against illegal activities is much more important than just seizing the goods. Every effort must be made to enforce an effective punitive system that positively reinforces the commitment of border control officers.

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SYNTHESIS OF THE UNIT In this unit we have discussed the importance of incentivizing voluntary operator compliance by establishing an information and assistance system and granting numerous benefits for highly compliant operators. Another point is the need to obtain relevant information on economic operators and classify them in order to define risk profiles. This same information will allow customs administrations to transition from a transaction-based control toward an operator-based scheme. Finally, we have underscored the necessity for a sanctions system that discourages illegal activities.

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Complementary Material n European Union Commission in collaboration with Member States

(2013). Handbook on Operational Controls. n State Tax Administration Agency, Spain (2015). Information on Customs Pro-

cedures for Operators (in Spanish). Available at: http://www.agenciatributaria.es/AEAT.internet/Inicio/Aduanas_e_Impuestos_Especiales/Aduanas_e_Impuestos_Especiales.shtml n Kingdom of the Netherlands (2015). Dutch Customs. Rotterdam. Available

at: http://www.belastingdienst.nl/wps/wcm/connect/bldcontenten/belastingdienst/customs/reference_books_and_other_information/other_topics/dutch_customs_on_video/dutch_customs_on_video n Kingdom of the Netherlands (2015). Cooperation with Dutch Customs. Rot-

terdam. Available at: https://www.youtube.com/watch?v=gkQZWFZIyUw n Kingdom of the Netherlands (2015). Customs Supervision. Rotterdam. Avail-

able at: https://www.youtube.com/watch?v=gkQZWFZIyUw n Kingdom of the Netherlands (2015). Customs Investigation. Rotterdam.

Available at: https://www.youtube.com/watch?v=V4QqTiYWvcQ n Kingdom of the Netherlands (2015). Customs Controls. Rotterdam. Availa-

ble at: https://www.youtube.com/watch?v=z_BH3VXdB6w

Bibliography n Bali Ministerial Declaration of 2013. Ninth Ministerial Conference of the

World Trade Organization. Bali. Indonesia. n World Customs Organization (2010). Customs Risk Management Compen-

dium. Volume 1. Brussels, Belgium. n World Customs Organization (2008). Strategy on Customs in the 21stCen-

tury. Brussels, Belgium.

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n World Customs Organization (2008). Customs in the 21st Century. Brussels,

Belgium. n Regulation (European Union) No 952/2013 of the European Parliament and

of the Council of 9 October 2013.