CRMCAR2 MÓDULO 1

CUSTOMS RISK MANAGEMENT

MODULE 1 Risk Management in Customs Administration to Ensure Efficient Supply Chains

Customs Risk Management. Caribbean

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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 Brenton Patten. Risk Management and Border Modernization Expert.

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 Figures.................................................................................................................... 5 Glossary ............................................................................................................................. 5 Module Introduction ....................................................................................................... 6 General Objective of the Module .................................................................................... 7 Learning-Oriented Questions........................................................................................... 7 UNIT I. THE IMPORTANCE OF HAVING DYNAMIC AND SECURE SUPPLY CHAINS AS THE BASIS FOR COMPETITIVENESS. RISK MANAGEMENT AS A TOOL FOR CONTROL AND FACILITATION ......................................................................9 Learning Objectives ......................................................................................................... 9 I.1. Risk Management to Expedite and Secure Competitive Logistic Chains .............. 10 I.2. Security in the Supply Chain. A Rising Value ........................................................... 15 I.3. Segmenting Clients by Level of Compliance. How to Promote Compliance ........ 18 SYNTHESIS OF THE UNIT ................................................................................................20 UNIT II. NEED FOR AN ORGANIZATIONAL FRAMEWORK TO SET UP A RISK MANAGEMENT SYSTEM .................................................................................... 21 Learning Objectives ........................................................................................................ 21 II.1. Unit Introduction ..................................................................................................... 21 II.2. Customs Administration and Risk Management: Organizational Aspects .......... 22 II.3. Customs Administration and the Creation of an Organizational Framework for Risk Management: Administrative Guidelines, Motivations and Requirements .. 25 II.4. Design an Organizational Framework for Managing Risk ...................................29 SYNTHESIS OF THE UNIT ................................................................................................ 33 UNIT 3. REGULATORY LEGAL FRAMEWORK AND HUMAN RESOURCES FOR RISK MANAGEMENT ..............................................................................................34 Learning Objectives ........................................................................................................34 III.1. Unit Introduction ....................................................................................................34 III.2. Legal Grounds for Risk Analysis ............................................................................. 35 III.3. Human Resources and Risk Management ............................................................ 37

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III.4. Risk Treatment ....................................................................................................... 37 SYNTHESIS OF THE UNIT ................................................................................................39 UNIT IV. RISK MANAGEMENT AS AN EFFICIENT AND EFFECTIVE COMPONENT OF BORDER MANAGEMENT. COLLABORATION WITH OTHER ADMINISTRATIONS AND OTHER COUNTRIES................................................ 40 Learning Objectives ....................................................................................................... 40 IV.1. Unit Introduction .................................................................................................... 41 IV.2. Collaboration with Other Administrations and Other Countries for Managing Risk........................................................................................................... 41 IV.2.1. Inter-Institutional Cooperation .................................................................. 41 IV.2.2. Cooperation with Other Countries ........................................................... 44 SYNTHESIS OF THE UNIT ............................................................................................... 48

Complementary Material .............................................................................................. 49 Bibliography ................................................................................................................... 49

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List of Figures Figure 1. Elements of customs risk management ......................................................... 24

Glossary  AEAT: State Tax Administration Agency, Spain.  AEO: Authorized Economic Operator.  AFT: Agreement for the Facilitation of Trade.  CBP: Customs and Border Protection.  CSI: Customs Security Initiative.  EU: European Union.  LAC: Latin America and the Caribbean.  MOU: Memorandum of Understanding.  OJEC: Official Journal of the European Communities.  RIF: Risk Information Form.  RILO: Regional Intelligence Liaison Office.  RKC: Revised Kyoto Convention.  SAFE: WCO Framework of Standards to Secure and Facilitate Global Trade.  SSTL: Smart Secure Trade Lanes.  ST: Special Taxes.  UCC: Union Customs Code.  WCO: World Customs Organization.

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Module Introduction The challenges of delivering diverse mandates in an effective and cost-efficient manner in today’s complex and global world has prompted international customs administrations around the world to incorporate risk management techniques with the purpose of protecting citizens.

The decision to include risk has led to other organizational decisions that have shaped the different layers of customs’ administrative and functional structure and, therefore, the need for specialized human resources.

One of the main contributing factors has been the development and growth of Information Technology (IT)-based systems available to manage customs procedures and harmonize risk management, thus increasing the security of the supply chain by effectively combining the objectives of security / control and trade facilitation.

In addition, the emergence of a globalized world economy, the explosive trading of goods and the establishment of bilateral, multilateral and regional commercial agreements have convinced national authorities of the advantages of implementing regional and international cooperation mechanisms between the different customs administrations and between customs and the private sector to tackle risks and facilitate the achievement of the objectives mentioned.

Inter-agency cooperation is not only necessary at international level but also at national scale between the different authorities that share border control responsibilities over inbound and outbound goods, as the evolution of world trade has broadened the range of customs risks. The tax and fiscal risks traditionally associated with international trade have expanded to include certain parafiscal risks related to sanitary and phytosanitary issues; industrial, intellectual and cultural heritage property; defense and dual-use goods; precursors of narcotic drugs and explosives; security, etc.

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As a consequence, customs administrations have felt the need to enter into collaboration agreements with other national and international authorities in the form of Coordinated Border Management schemes that charge them with the major task of mitigating trade-related risks and facilitating the transit of trade operators through customs. The ultimate goal is to ensure higher levels of competitiveness for supply chains while securing the effectiveness of the control measures adopted.

As an example of national cooperation between agencies from different ministries, authorities have put into practice projects such as the single window, which simplifies the parafiscal and customs formalities required from operators. Now it is possible to lodge all the documentation required with one single entity that distributes it to all other agencies concerned. Another example is the one-stop-shop, which allows coordinating all authorities with border enforcement responsibilities by enabling a single positioning of goods for physical inspection, thus avoiding multiple and costly relocations.

General Objective of the Module To demonstrate the need for customs to base its control decisions on risk management to fulfill its mission of ensuring and facilitating trade, protecting its borders, and maintaining its duty-collection obligations in a manner that maximizes the use of the resources available. This implies the adoption of certain measures that affect the organization, the availability of resources and the establishment of channels for inter-institutional coordination and cooperation with other countries.

Learning-Oriented Questions ď Ž How would you define the notions of customs risk and risk management? ď Ž In your opinion, what are the main administrative characteristics of risk management? What are its advantages?

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ď Ž What control measures can be adopted to deal with security risks? ď Ž In your opinion, what are the prospects of inter-institutional and international cooperation to increase the efficiency of tax and non-tax risk management?

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UNIT I THE IMPORTANCE OF HAVING DYNAMIC AND SECURE SUPPLY CHAINS AS THE BASIS FOR COMPETITIVENESS. RISK MANAGEMENT AS A TOOL FOR CONTROL AND FACILITATION

Learning Objectives At the end of this unit, participants will be able to:  Recognize the current impact of security and protection-related issues in customs' control duties.  Assess the importance of the new role of customs in expediting logistic channels and promoting competitiveness.  Identify the tools or instruments developed by the World Customs Organization to concentrate controls on higher-risk operations.

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I.1. Risk Management to Expedite and Secure Competitive Logistic Chains Since the mid 1990s, a number of important changes in customs procedures have been introduced that affect the entry and exit of goods. These changes have come in response to the major transformations in international trade. Communications and transportation have made big gains in time and security, propelling global trade into a phase of unprecedented growth that has shifted priorities toward cost efficiency. The result has been a process of delocalized production that has promoted trade and boosted global economy. As an example, in the 1950s trade represented 8% of the world’s GDP vs. today’s 25%.

Latin America and the Caribbean is no exception to this trend. In 1987, trade accounted for 15% of LAC’s GDP compared to the current 40%. Most of the region’s economic and social growth and development is supported by trade, and there are no signs that this will change.

Aware of the importance of trade, in December 2013 the World Trade Organization adopted the Bali Ministerial Declaration on the Facilitation of Trade, which still needs to be ratified by two thirds of WTO members.

The Bali Declaration considers an Agreement on Trade Facilitation (ATF) that is very important not only for the global economy, but especially for Latin America and the Caribbean. https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm The ATF is born:  At a time when tariff reduction can no longer be considered a driver of trade (tariffs have fallen from 40% in 1985 to 10% today).

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 After a period of bustling activity in terms of bilateral and multilateral agreements that have built a complex network that covers 50% of the world’s trade.  At a time when south-south trade is a booming phenomenon (up from 5% in 1990 to 18% in 2013), with great participation of emerging countries in the development of global trade (up from 19% in 1990 to 40% in 2015).

Most of the measures proposed in the ATF relate to customs, especially Article 7 on the Release and Clearance of Goods, section 4 - Risk Management.

According to the ATF, each member shall, to the extent possible, adopt and maintain a risk management system for customs control.

Also, the Revised Kyoto Convention, which predates the ATF, establishes the principles of customs risk management (CRiM), with provisions that deal with the technical aspects of risk management and customs control. http://www.wcoomd.org/en/topics/facilitation/instrument-andtools/conventions/pf_revised_kyoto_conv.aspx It can therefore be stated that customs play a cardinal role in the logistics of supply chains. Customs may be considered one more of the links that make up supply chains.

Customs procedures and the associated control time have a direct impact on the costs of enterprises, thus affecting their competitiveness. All these factors may lead producers to invest in countries or regions that offer guarantees of trade facilitation and security.

Now let’s examine the history of customs controls and some of the transformations that have taken place simultaneously with changes in trade.

In most countries, and well into the 1990s, customs controls were applied to almost all operations. At each customs office, import, export and transit inspections were

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assigned to an officer who, having goods and the required documentation at his/her disposal, decided on whether a review of the accompanying documents was enough or if it was necessary to proceed with a physical inspection of the goods.

The officer had the power to decide which method to apply based on his/her training and experience, and any applicable regulations issued by the customs authority.

This was an elemental and rather primitive way to conduct risk analysis, as any decision prior to the release of the goods implied gaining access to its shipping information and choosing among various procedural options to achieve the best results.

Finally, the evolution of trade propelled by globalization and world trade, on the one hand, and the regionalization process affecting certain countries together with increasingly complex regulations, on the other, eventually evidenced the flaws and deficiencies of the traditional control approach based on a detailed inspection of all the documentation attached to the customs declaration. The work overload became simply unmanageable, far too costly to maintain, created unacceptable delays to trade, and the lack of a harmonized system to determine the number and type of controls required made it indispensable to adopt a risk analysis method as the only way to monitor shipments. The old system was also prone to corrupt practices by customs officers.

In fact, controls were developed, risk panels were classified by sector, indicators were identified and actions were taken without adherence to any regulatory models. Instead, they were applied randomly or opportunistically.

Add the lack of planned risk analysis and the entire model led inevitably to the adoption of isolated measures that in some cases interfered with the smooth delivery of services due to their disorganized accumulation.

As a result, any attempt to assess the results obtained from the control measures applied was simply impossible.

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The overwhelming changes in the economy were leaving customs with a disorganized structure that hampered the introduction of a sound risk analysis and management program.

The need arose for an administrative arrangement that could keep up with the changes in a systematic way, unlike the then-prevailing trend of basing most control options on quantitative criteria (a company's volume activity) or in response to an occasional event.

Such arrangement required using risk analysis techniques that obtained information from various sources and allocating resources to those areas considered riskier and therefore necessitating customs controls.

The urgent need arose for procedures that helped to optimize the use of existing human and material resources for dealing with the growing commercial traffic and for a system of expeditious and secure customs controls that left no room for subjectivity regarding regulatory compliance.

On the other hand, the scarcity of resources and the obligation to adhere to the regulation while fulfilling the objective of facilitating trade make it impossible to inspect 100% of foreign trade operations, hence the impending need for a customs risk management approach to achieve balance between control and facilitation.

Risk management must focus on inspecting and controlling consignments that are truly suspicious while ensuring the rapid completion of customs formalities for those that can be considered reliable.

This process seeks to maximize the use of human, technical or material resources by focusing them on the highest risk areas and not on low risk ones. This approach makes better / smarter use of resources with reduced negative impacts on trade. To that end, the different risks must be identified, their magnitude assessed and resources allocated to keep them to a minimum, acting on them selectively.

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The system must minimize threats by coordinating priority control efforts and informing of the results obtained to monitor progress and allow the effective review of the entire process.

Only with this last information will it be possible to assess the effectiveness of the efforts to fight specific frauds or the procedure as a whole. This is an essential component in every risk management system.

In addition, the information allows evaluating the performance of customs officers, as their work is saved in IT systems for later review.

It is therefore indispensable that the customs administration:  Possesses sufficient knowledge to make the structural decisions inherent to a risk management model and incorporates new risk analysis techniques.  Understands sufficiently what their highest risk areas are and is able to prioritize resources toward them.  Implements an advanced and institutionalized IT system; thorough, updated and reliable information from national and international databases; and tools to use the data appropriately. This allows processing raw data into “indications”, either to identify specific potential risk areas or to prepare a certain file in particular.

These indications may be of three classes, as inferred from the WCO Customs Risk Management Compendium Volume 1:  Strategic indication: in this case, information is evaluated according to general trend models used by customs policy planners and managers to identify problem areas and make timely decisions regarding resource allocation and measure adoption.

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ď Ž Tactical indication: this refers to the information collected to support the analysis during the investigation process. The data is analyzed according to shipment volume, means of transportation, organizations and individuals. ď Ž Operational indication: in this case we are dealing with specific information that allows direct intervention on site without previous preparation. For example, it may refer to the location of suspicious consignments.

I.2. Security in the Supply Chain. A Rising Value Starting in 2002, a number of national customs administrations like the CBP in the United States and CBSA in Canada, international agencies like the World Customs Organization, and customs unions like the European Union began implementing different initiatives based on the common core element of security.

Examples of these initiatives can be found below: http://www.cbsa-asfc.gc.ca/trade-commerce/facil-eng.html https://www.cbp.gov/border-security/ports-entry/cargo-security/csi/csibrief Is it possible to think that the terrorist attacks of 9/11 have transformed our vision of the world?

Security and protection have become strategic aspects, with deep implications in customs and its regulatory environment.

The WCO has defined its SAFE Framework of Standards to Secure and Facilitate Global Trade and the EU has introduced an amendment to its customs code known as the Safety and Security Amendment.

The underlying purpose of these measures is to implement risk-based control systems that protect our transportation system from future attacks without incurring excessive costs for the private sector and citizens at large.

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The following are some of the main guiding principles:  Citizen security and protection are of cardinal importance for the customs administration.  The growing trade of goods is another characteristic of the globalization of the world's economy that impacts every country’s national economy.  Customs plays a critical role in balancing a nation’s security and prosperity agendas.  Collaboration, cooperation and mutual assistance between customs administrations is the best way to tackle new risks.

What do customs plan to do to deal with this new challenge to secure the trading of goods?  Increase the efficiency of customs formalities and reduce the administrative burden.  Protect intellectual property.  Fight against fraud, organized crime and terrorism.  Increase sanitary and environmental protection.  Promote increased trade facilitation.

How? By structuring a comprehensive risk management system, among other measures.

The SAFE Framework provides a systematic approach to these strategic issues that have led customs to introduce new elements and procedures to modernize and simplify its role while maintaining its traditional duty-collection responsibilities.

In the case of the European Union, the measures adopted in line with the SAFE Framework include: 17

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ď Ž Defining the concept of risk and the risk management process. ď Ž Mandating the requirement to lodge entry declarations prior to the arrival of inbound goods and exit declarations prior to the exit of outbound goods from the customs territory. These declarations must contain specific data related to security. ď Ž The concept of Authorized Economic Operator (AEO) has been introduced as a trusted customs operator.

What is the role of this trusted operator in the new enhanced security environment?

The Authorized Economic Operator is certainly one of the most important channels for customs to perform their new role in favor of legitimate trade and the security of supply chains. The AEO represents a strategic association between a given trading company and the customs administration.

One example of the development and implementation of a comprehensive AEO Program can be found below in the EU: https://ec.europa.eu/taxation_customs/general-informationcustoms/customs-security/authorised-economic-operator-aeo_en What are the main characteristics of this trusted operator?

The Authorized Economic Operator (AEO) may be defined as an economic operator whose customs operations have been validated and are considered trustworthy and, therefore, can be trusted to enjoy a number of benefits aimed at simplifying and speeding up the border clearance process. In some countries, and following the recommendations of the WTO SAFE Framework to provide incentives to operators such as reduced controls, efforts are being made to establish mutual recognition between countries and with other trust programs in other fields like civil aviation, foreign trade of dual-use products, etc.

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International cooperation?

The global security of the supply chain is supported by the possibility of entering into mutual recognition agreements between the AEO programs of two or more countries, thus guaranteeing security from the origination of the goods to their destination.

This identification of trusted supply chains allows customs administrations to focus their resources on other shipments that appear to be less reliable.

I.3. Segmenting Clients by Level of Compliance.

How to Promote Compliance Risk management allows the customs administration to organize controls according to a control plan.

Similarly, risk management focuses on customs regulatory compliance. Instilling a sense or risk awareness in users is key to promote voluntary compliance.

Should all potential operators be subject to control?

Yes, risk management allows potential control over all operators, although actual, physical or document inspections are only conducted on operators selected by the risk management system. The level of control should be guided by the risk associated with the transaction, trade chain parties or other factors. This is the basis of a risk-management approach.

In order to successfully combine the dual objective of control and facilitation while ensuring the efficient use of its resources, the customs administration may resort to

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IT tools to facilitate customs formalities to operators with a good compliance record.

Different criteria may be applied to classify operators and determine which controls are to be executed.

Does the customs administration classify clients into segments?

As we have seen, the AEO program is a way to classify users in terms of their compliance history and the fulfillment of a number of security requirements. Those operators accredited as AEOs are considered low risk and reliable and consequently may benefit from fewer customs controls.

What happens with those operators not accredited as AEO? Can they be discriminated and subject to selective controls?

Administrations have looked for ways to retain the effectiveness of their procedures by avoiding excessive controls over operators without the expected results.

The idea is to achieve optimal effectiveness by applying a variety of criteria: ď Ž Classify operators into risk groups according to their history of compliance in order to execute controls selectively, concentrating controls on those operators with repeated violations and reducing them for operators with a better compliance record. ď Ž Identify operator groups by their history of non-compliance and the risks identified (intellectual or industrial property counterfeiting, tobacco smuggling, etc.).

Relevant control measures will be applied according to specific risk profiles for these groups of operators and their frequency and level of detail will be determined using mechanisms for automatic selection based on the results of the controls executed over risk operators.

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Once the criterion used to group these operators has been established, it is important to remember that an electronic customs environment requires the use of technical means enabling their identification by the system and the application of control selectivity.

SYNTHESIS OF THE UNIT In this unit we have discussed the need to control and secure the supply chain through risk management in response to the increase in trade volume and the impossibility to conduct a physical inspection of 100% of the goods.

Customs therefore plays a major role in ensuring the efficiency of its controls in order to avoid transit bottlenecks and to contribute to the competitiveness of companies and their countries.

Customs relies on risk management and on operator segmentation based on their compliance history. This allows it to implement effective controls for a better achievement of the objectives of trade facilitation and security. In this context, customs eases controls for those operators that pose less risk, thus dedicating the scarce resources available to higher-risk operations.

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UNIT II NEED FOR AN ORGANIZATIONAL FRAMEWORK TO SET UP A RISK MANAGEMENT SYSTEM

Learning Objectives After completing Unit 2, participants will be able to understand the organizational implications of a customs risk management system.  Identify the main guidelines to follow in establishing an organizational framework for risk management purposes.  Design an organizational framework for risk management.  Determine the administrative requirements for the application of a risk management program.

II.1. Unit Introduction There is risk in all aspects of life. Every decision carries with it the risk that something negative may happen, such as a car accident when driving to work, running over a distracted pedestrian, or coming to work late as a result of a traffic jam. Not

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all risks can be controlled, but we can prevent some of them from occurring, control their frequency or minimize their effects.

More specifically, the idea of risk is inherent to every organization. Customs dedicate a lot of work and public resources to fulfilling the mandate to control the movement of goods and passengers into and out of a territory while ensuring dynamic interventions, securing the supply chain and delivering a service of excellence to foreign trade operators.

This service may be affected by a number of different risks that may be either internal—such as organizational, coordination and procedural factors as well as comprehensive policies for intervention and inspection by sector—or external—like the increase in contraband activities and the lack of customs compliance, among others.

On the other hand, the resources available to carry out customs-related functions are usually scarce, so they must be used sparingly in order to ensure the proper operation of all areas of the organization while minimizing the effects of risks.

For an example of a government-wide framework approach to risk management, please refer to the link below: https://www.canada.ca/en/treasury-board-secretariat/corporate/riskmanagement/guide-integrated-risk-management.html

II.2. Customs Administration and Risk Management: Organizational Aspects Customs must identify all potential risks that may affect them and make decisions aimed at addressing risks, such as removing them or mitigating them according to the organization’s degree of tolerance or maturity toward them.

To tackle risk efficiently, senior management must embrace risk management and ensure it can be successfully implemented. This should be done through the devel-

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opment and implementation a dynamic working framework that must be improved continually and integrated into all other customs procedures, in line with the existing strategy and planning.

Management must identify two essential points: ď Ž The main objectives and activities of the customs function that are expected to improve through risk management. ď Ž The types of risk at hand: tax and non-tax risks.

Traditionally, the risk of failing to collect the taxes for which it is responsible has been a major concern for the customs authority, but that does not mean that nontax risks can or have been overlooked. In recent years and in most countries, these risks have increased as a result of the globalization process and the opening of economies to international trade, hampering control over a large number of operations and transactions. Hence the importance of inter-institutional and international cooperation.

Based on this identification, customs administrations must decide how they plan to incorporate risk management into their corporate structure and how they will coordinate their role with that of other government agencies with border enforcement responsibilities or the customs administrations of other countries.

Also, establishing a risk management policy that is appropriate can help to use the scarce resources available more efficiently.

Evaluating and controlling efficiency in the public sector has become a key aspect in developed economies and citizens keep close monitoring to it, as they want to know where their taxes are going.

Broadly speaking, customs risk management consists of a series of key elements, as suggested by the ISO 31000: 2009 Standard on Risk Management: https://www.iso.org/iso-31000-risk-management.html

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1. The mandate and commitment born at customs senior management level and incorporated into all levels of the organization.

2. Designing the framework for managing risk.

3. Implementing the risk management framework.

4. Monitoring and review.

5. Continuous improvement of the framework.

Figure 1. Elements of customs risk management Source: Adapted from Risk Management (ISO Standard 31000: 2009).

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II.3. Customs Administration and the Creation of an Organizational Framework for Risk Management: Administrative Guidelines, Motivations and Requirements As a result of the situations mentioned above, customs authorities have implemented risk management processes that enable the adoption of measures to deal with the risks of illegal trade and non-compliance with the relevant tax regulation while securing the quantitative and qualitative identity of the goods contained in customs declarations.

Let us not forget other non-tax regulations that also affect the entry and exit of goods from the customs territory, such as sanitary standards (human or animal consumption, plant health), standards for the protection of industrial and intellectual property, for defense and dual-use materials, for precursors of narcotic drugs and explosives, for the protection of cultural heritage, etc.

In order to identify and mitigate prevalent threats and risks, customs must adopt an organizational framework for risk management.

What are the administrative guidelines and factors to consider when designing an organizational structure for risk management? The WTO Customs Risk Management Compendium, Volume 1, distinguishes the following: ď Ž Commitment from the head of customs and senior managers. http://www.wcoomd.org/en/topics/enforcement-andcompliance/instruments-andtools/~/media/B5B0004592874167857AF88FC5783063.ash

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The head of customs is responsible for achieving the strategic objectives and allocating the resources available efficiently. It must therefore be familiar with the risks facing customs activities and voluntarily adopt the measures to mitigate them, such as defining a risk management policy formally established in the national customs regulation.

It must be a holistic and comprehensive approach to risk management, spanning everyone from the head of customs to the frontline. In other words, risk management must be fully integrated into the customs structure and comprise the entire organization.

After committing to organize customs control according to a risk management system governed by a formal regulation, the commitment must be embedded as an integral part of all organizational processes. ď Ž Risk management must support all risk-based decisions.

Once the decision has been made to organize controls according to risk management techniques, controls will be executed all along the transit process, i.e. prior to the arrival of goods in the customs territory, thus fulfilling the objectives of security and protection, during the assignment of a customs regime and at the time of subsequent or post-entry control.

This principle applies equally to the movement of passengers. ď Ž Risk management should be systematic and structured.

The unit that receives the mandate to enforce the customs risk management policy from the head of customs is responsible for defining the process guidelines and for ensuring their systematic and structural implementation at all levels. The framework will only become holistic if all levels and human resources of the organization are involved. ď Ž Risk management focused on customs compliance.

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Regardless of the mechanisms and advantages set up to promote voluntary compliance with the customs regulations, a policy and techniques for managing risk should be developed and applied to constitute an additional incentive for compliance, as reliability contributes to facilitate compliance with customs formalities. ď Ž It requires a robust organizational risk management framework empowering officers at all levels of the administration to make risk-based decisions in a systematic manner.

The head of customs must set the administrative structure required for managing risk and assign specific functions and tasks to the different administrative customs units that make up that structure. It must clearly communicate these functions by means of timely instructions and administrative arrangements. It will ultimately be responsible for disseminating and enforcing the risk management procedures across the customs administration. ď Ž Risk management must be based on quality information derived from intelligence and other information sources such as historical data, officer experience, feedback from private actors, forecasts, and expert judgment.

The head of customs must promote the adoption of the standards required by customs authority to gain access to tax and non-tax information (financial, labor, etc.).

It must also provide the technical means required for incorporating information into the risk management measures during the entire process, including feedback, on both the internal and external fronts, and considering the observations, knowledge and impressions of frontline operators. ď Ž Risk management must be an ongoing and dynamic process that responds to changes in the environment and to potential new risks.

Risk management contributes tangibly to the achievement of customs objectives and the improvement of officer performance by validating legal requirements and their acceptance by operators, as it enhances the quality of the customs process, the effectiveness of its operations, its governance and reputation. But in order to 28

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sustain this high standard, risk management must be perceived as a dynamic process that requires information on the evolving environment and ongoing improvement to ensure its flexibility.  The framework must be aligned with the administration’s objectives and priorities to ensure their achievement.

The best way to achieve the objectives set for the customs administration is through an Objective Plan that clearly articulates the actions required for each objective and a timeline with precise deadlines for their achievement. The head of customs must approve the objectives aiming at reducing risk by assigning levels of priority (high, medium, low) and giving each unit (Risk Committee, Central Risk Analysis Unit, Selection Center) the task of preparing a plan and designing the actions required to monitor compliance and report to the head of customs as often as needed (semi-annual, annual, etc.).  Establish indicators that monitor customs performance under a risk management policy.

The risk management policy must outline the mechanisms required for the continuous improvement of customs activities. This implies monitoring the objective plan and the performance of customs administration by internal auditors in accordance with their own oversight plans.  Need to develop a strategy to communicate the adoption of a risk management policy.

Customs authorities must determine how they will inform stakeholders of the changes and the new or revised regulations introduced in accordance with the policy to promote voluntary compliance. In addition, and in order to enhance their image and/or reputation, they should increase the visibility of their work or the decisions made to tackle current risks (e.g. measures to reinforce the security of the supply chain, fight against industrial or intellectual property infringement, etc.).

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II.4. Design an Organizational Framework for Managing Risk After confirming the need for and establishing the guiding principles of an organizational framework for managing risk, the customs administration can develop such a framework based on a number of principles extracted from the WCO Customs Risk Management Compendium, Volume 1: 1. Understanding the organization and its context.

A clear understanding of customs’ operating environment is an important step in developing the organizational framework. This implies an identification of the internal and external factors that influence the way it may achieve its objectives.

External factors may include political, economic, social and technological considerations.

Internal factors may encompass structural, governance and operational issues; knowledge and contact with operators; risk management culture and tolerances; access to information and management possibilities; and customs procedures and processes. A previous scan of these internal elements is crucial to understand existing restrictions and the real possibilities to overcome them in order for the risk management system to achieve a degree of integration and consistency that is appropriate for the organization’s level of maturity.

It is also important to consider the limit of admissible tolerance to the introduction or development of a risk management system for operators, other authorities and agencies responsible for border enforcement, stakeholders and citizens, as this will

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show the extent to which the system should be developed and the way to apply it in practice.

2. Establish a risk management policy.

Each customs administration must establish its unique risk management policy, which will materialize in the form of regular plans that outline the organization’s programs, approach and intentions regarding control.

Among the main elements of the customs risk management policy, we can cite the following:  Linking organizational goals and objectives with risks.  Risk strategy.  Linking risk management to strategic and business planning processes.  Level and nature of risk that is acceptable (risk appetite/tolerance).  Risk management organization and arrangements.  Information on risk identification and evaluation techniques.  Risk mitigation requirements and control mechanisms.  Specific accountabilities and responsibilities for managing risks.  Criteria for measuring risk management performance.  Assigning dedicated human and technical resources to the implementation of risk management.  Internal and external communication and reporting plans and systems.

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ď Ž Timeframe for periodic review of the risk management policy and associated plans.

A risk policy grounded on these principles is likely to offer high levels of transparency and a durable management model. Officers responsible for its implementation must base their decisions on the principles that support the policy, thus ruling out arbitrariness and abuses of discretion.

At the same time, it will promote an effective and efficient use of the resources available and allow for the development of a culture of periodic review of the measures issued from the action plans, thus increasing the operational capacity of those resources.

Finally, the policy will ensure the capacity of the organization to respond quickly and efficiently to potential risks that may arise in the future.

3. Design a policy that allocates responsibilities and accountability.

The head of customs or organizational head and senior managers who define the customs risk management model must be aware of the need to define an organizational structure that allocates authority and responsibility to implement the risk policy and to set up a chain of authority throughout the organization to communicate the processes derived from the policy and define the roles and responsibilities associated with them.

Senior managers have the ultimate authority to organize the human resources responsible for risk management and for the execution of control plans once priority risk areas have been identified and assessed. It must also ensure that lines of authority flow in both directions, down to the operational units and up to senior management, with the results of the actions planned to mitigate risks (feedback).

Depending on organizational structures and arrangements between authorities, responsibility for the risk management model may be placed on a national risk man-

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agement committee, a central risk management unit, and/or a risk assessment/targeting center.

A risk management committee is generally responsible for defining a unique interpretation of control programs and the associated actions to mitigate risks and for reporting to the senior committee the results of the actions performed to comply with the risk management plan. Typically, the functions of the risk management committee include the preparation of strategic plans in line with the principles established by the senior committee and the development of activity plans and associated timeframes, as well as a review of the organizational controls and results in order to ensure their effectiveness and efficiency.

Central Risk Management units and/or Targeting Centers are often responsible for information collating, analysis and assessment in order to provide risk indicators and profiles for goods, people, and means of transportation.

4. Identify resources.

It is important to ensure that sufficient human resources are allocated to the management of customs risk, with special thought to their experience and competencies for risk management functions, for which purpose periodic training sessions should be implemented across the organization.

Technical resources have become an increasingly important component of a risk management strategy.

Attempting to process today’s enormous amounts of information without the right data treatment tools is simply impossible. Customs administrations must obtain the funds necessary to provide risk management units with adequate technology to allow for the early detection of risks and the adoption of appropriate measures.

5. Integrate risk management into customs processes.

Effective customs risk management cannot be practiced in isolation, but needs to be embedded into customs processes and procedures.

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Each customs administration has its own way to integrate risk management. However, the following factors may be considered:  Introducing a system of incentives and rewards.  Including risk management as part of performance measurement at all levels of the organization.  Aligning risk management with objectives.  Preparing supporting guides to facilitate performance.  Defining results indicators for customs risk management.  Design an internal and external communication policy.

A policy to communicate the guiding principles behind risk management plans, both within the organization and to external operators and stakeholders, is a clear indication of good risk management.

The capacity of the internal administration to communicate is essential for knowing and understanding the risk management model and for the successful introduction of innovations and modifications. It is important to communicate results, especially when frontline staff proposes control measures aimed at determining and evaluating whether they should be maintained or adapted to new circumstances.

SYNTHESIS OF THE UNIT In this unit we have covered the principles that must guide the organizational framework for managing risk at customs.

We have also reviewed their organizational and administrative implications for customs.

We have examined the importance of a risk management policy. Its development requires a special effort to understand the present context of customs administration.

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We have explained that a risk management policy requires the identification of the resources needed for its implementation.

The risk management policy must be supported by a system that ensures the internal and external dissemination of customs’ new operating procedures and processes.

UNIT III REGULATORY LEGAL FRAMEWORK AND HUMAN RESOURCES FOR RISK MANAGEMENT

Learning Objectives  Understand the need for a suitable legal and regulatory framework.  Understand the importance of employing the right human resources.  Identify the measures needed to reduce risk exposure.

III.1. Unit Introduction Any effort to establish an effective risk management policy must begin with a clear definition of what needs to be managed. It is important to establish a strategic and 35

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organizational context to assume the political commitment and ensure the allocation of sufficient human and material resources. Another essential ingredient is the strategic decision regarding the development of tools and instruments to manage all the information required for risk management, which must also adhere to the tax control plans contained in the national tax strategy, thus contributing to a transparent administrative activity.

The legal and regulatory framework should also provide sufficient legal guarantees for effective risk management, including efficient controls, dynamic trade and efficient use of resources.

III.2. Legal Grounds for Risk Analysis The big transformation in customs processes since the 1990s, fueled in part by the expansion of global trade, has affected both customs procedures and control interventions through the introduction of risk management techniques. Customs authorities have been quick to realize the importance and the need to provide control activities / tools with an adequate legal basis supported by risk management techniques and a risk management policy in line with international standards.

The legal basis not only adds legitimacy to the control actions carried out by customs authorities and executed by frontline staff, but also constitutes a framework of guarantees for citizens. The legal framework allows customs authorities to decide how to organize the human and technical resources needed to conduct their function, thus materializing their mandate to facilitate trade while ensuring compliance with all other objectives, without disregarding any relevant control activities associated with the risk management policy adopted.

The legal framework must include sanctions or penalties to discourage noncompliance with customs regulations and illegal acts while promoting voluntary operator compliance and a system of appeals.

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Finally, the legal framework must mandate that the customs authority render accounts for its activities as a guarantee that the objectives set up for it will be achieved.

Going into further detail, the following aspects may need to be present in the legal framework: National customs regulations should be consistent with current international agreements (Kyoto Convention, SAFE Framework, WTO Agreement for the Facilitation of Trade, etc.).

Access to foreign trade operators’ customs and tax information and data related to partnerships that could have tax significance.

Determining the reach of the verifications conducted by customs officers, with a clear definition and specification of their characteristics (documents, type of documents, non-intrusive or physical control of the goods with the possibility of getting samples for customs laboratory analysis, etc.), leaving no room for discretion abuse to ensure transparency, yet allowing for decision flexibility based on compliance with certain requirements that must be duly justified and subject to internal audit.

Given the rise in fraud activities such as money laundering, the regulation must consider the possibility of establishing collaborative agreements between tax, customs and financial authorities to inform customs about capital movements based on information supplied by banks (for example, the circulation of $100 bills).

Another important aspect has to do with simplified procedures to benefit operators with high levels of compliance, solvency and reliability.

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The regulation must include internal audit mechanisms to verify the interventions of customs officers in order to ensure compliance with the objectives assigned to them and to protect the nation’s tax and non-tax interests.

It must also promote inter-institutional and international cooperation to expedite information on entry and exit procedures and to promote the exchange of regular and sensitive data (intelligence).

III.3. Human Resources and Risk Management Customs authorities must make decisions related to the allocation of technical and human resources needed to implement a risk management policy in accordance with the criteria included in the relevant legislation and budget availability.

The staffing policy must be planned in a manner that aligns with organizational risk and should consider the ratio of replacement in the different levels of the organization and the evolution of customs activities.

But not only is the number of officers important. Several other factors need to be considered, such as the demands associated to each position, officer competitiveness, experience and knowledge of management procedures, expertise in customs activities at all levels from strategic to operational, competency requirements, knowledge of customs economic and commercial environment, proficiency in information technologies, mastery of other languages, etc. In other words, professional profiles must be designed in line with the demands of the risk management policy.

A network of contacts should be created among public entities with agencies that perform border interventions in order to promote collaboration and the exchange of activities.

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Officer exchange programs with other national and international agencies should also be encouraged in order to better understand each administration’s specific context, thus contributing to improve customs procedures and share information.

Finally, we should not forget the need to train officers in risk analysis to deepen their knowledge and promote program development.

III.4. Risk Treatment Among the various measures suggested by the WCO to decrease risk exposure, we can cite the following:  Development of an electronic customs IT system to facilitate risk management, expedite the shipping of goods and enable automatic exchange of information with third parties.

Examples: https://www.dhs.gov/publication/automated-targeting-system-atsupdate https://www.cbp.gov/trade/automated  Trusted operator programs such as the AEO.  International security cooperation agreements to facilitate the entry of goods.  Cooperation agreements between border control authorities to reduce their workload and harmonize control timetables.  Harmonizing risk management as part of regional integration initiatives.

This is particularly important, as the existence of customs unions such as the EU that allow the free circulation of goods requires the same levels of control and security along its entire external border to prevent vulnerabili-

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ties to commercial detours for reasons that are not purely economic. The WCO recommends:  Defining common risk profiles.  Developing electronic tools to facilitate the exchange of information on risks.  Conducting periodic intensive control operations over certain movements of goods.  Implementing the mutual recognition of concepts like AEO or equivalent with other agencies.

SYNTHESIS OF THE UNIT In this unit we have reviewed the legal framework and staffing requirements to ensure efficient and effective customs risk management, together with other measures that may be adopted to reduce customs risks.

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UNIT IV RISK MANAGEMENT AS AN EFFICIENT AND EFFECTIVE COMPONENT OF BORDER MANAGEMENT. COLLABORATION WITH OTHER ADMINISTRATIONS AND OTHER COUNTRIES

Learning Objectives At the end of this unit, participants will be able to:  Understand the benefits of collaboration between agencies of the same country that share border control responsibilities in expediting the release of the goods.  Analyze different ways of cooperation between agencies of the same country.  Understand the need for international cooperation as a way to deal with common risks such as financial risk.

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ď Ž Understand the importance of international cooperation in managing security risks.

IV.1. Unit Introduction Customs authorities may conduct as many customs controls as deemed necessary to mitigate the risks that threaten the execution of their mandate.

In an electronic environment, all customs controls that are not randomly selected must adhere to a risk analysis approach which, through electronic data treatment, helps to identify and assess risk and introduce the corresponding mitigating measures based on criteria established at national or international level, in the case of a customs union.

For example, Spain is a member of the EU and the regulation has been established in article 46 of the UCC. National customs authorities must resort to risk management techniques to distinguish between the various levels of risk associated to the goods subject to customs control or surveillance before determining which ones require specific intervention.

IV.2. Collaboration with Other Administrations and Other Countries for Managing Risk IV.2.1. Inter-Institutional Cooperation One of the most frequent and recurrent complaints customs authorities receive has to do with the burden of formalities operators need to complete with different public entities before their shipments are released and the high costs associated with the physical inspections of their shipments.

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The situation worsens when the inspection is required by different agencies separately, which entails having to move and reposition the goods several times, thus increasing expenses and delays.

In response to these demands, legislators in the EU have established that customs shall coordinate with the different authorities with border control duties so that such controls are performed, whenever possible, simultaneously and at the same location as customs controls (UCC Article 47).

Again, coordination and the exchange of information between the agencies involved is crucial to redress these situations, which are indicative of an inefficient administration.

This issue and its possible solutions may be dealt with from different perspectives.

From an organizational point of view, authorities may decide to solve the problem by developing IT solutions on a national scale, or to establish coordination mechanisms at local level between the agencies involved by providing specific software to help reach these objectives.

Besides the organizational aspect, it is important to set up a coordination plan for the agencies concerned. Two options are available: ď Ž Designing a single window mechanism. ď Ž Establishing a one-stop-shop system.

Both options are based on the independence of each party involved in the decision process. Each agency will make its own decisions in accordance with the jurisdiction and responsibility assigned to it by the national legislation.

Experience has shown that the single window system is easy to apply for reducing the administrative load on two fronts: ď Ž Single window for the port authority, where cargo manifests are to be presented and the related data are transferred electronically to the cus-

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toms authority. The procedure fulfills the dual purpose of lodging the summary declaration and the cargo manifest in one single declaration.

The positive results obtained with this system of close collaboration have prompted the Spanish customs authority to expand the single window system to include other actors with border enforcement responsibilities such as goods control, paracustoms agencies, phytosanitary and veterinary control, market surveillance, etc. ď Ž Single window for the customs authority to allow the lodging of the customs declaration and the tax declaration with another administrative authority in charge of collecting specific taxes from foreign trade operations.

On this second front, customs is responsible for transferring the data. Also, the customs authority has encouraged other administrative authorities to use its unique risk profile tool to carry out their own controls independently. The declarant can thus lodge ONE single declaration and receive ONE reply regarding control decisions from both authorities.

The one-stop-shop mechanism is one step below the single window. It has been designed to organize a combined performance of the physical controls carried out by border control agencies. The agencies concerned combine their efforts to inspect the goods selected and verify the customs and tax documentation, as appropriate. For example, trusted operators like AEOs may be informed of the intention to conduct a customs verification of the documents prior to arrival.

The one-stop-shop system implies collaboration in designing technical developments and the creation of an electronic repository of information to inform which declarations will be subject to physical inspection. This will allow declarants, customs officers and other agencies involved to carry out the control at the same time and at the same place.

Other examples of inter-institutional cooperation include the customs controls of radioactive shipments.

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Intervention mechanisms need to be defined for the identification of undetected movements such as illegal trafficking of nuclear and radioactive material at specific ports.

These protocols define the functions and responsibilities of the different public agencies during a positive detection of radioactive material as well as the steps and communication lines associated with the control of radioactive material at borders.

In Spain, this protocol allows coordinating:  the customs authority and the Customs Department (Tax agency) through a centralized warning mechanism;  the port authority under the Ministry of Development;  the police authority under the Ministry of the Interior;  the Nuclear Safety Council under the Ministry of Energy; and  the specialized transport units under the Ministry of Transports.

Caribbean example of Barbados single window: https://esw.gov.bb/Home

IV.2.2. Cooperation with Other Countries Belonging to areas of free trade or customs unions requires the implementation of mechanisms to enable the exchange of risk information among member countries in order to avoid gaps applying the regulation or the reporting of frauds detected in one country that are likely to occur in another one.

Examples: https://tt.usembassy.gov/tag/customs-mutual-assistance-agreementborder-control-contraband/

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http://europa.eu/rapid/press-release_IP-14-555_en.htm http://www.treaty-accord.gc.ca/text-texte.aspx?id=105337 As has already been noted, administrations need to work more closely on risk management in order to prevent potential detours in traffic through "weaker points" where controls are less rigorous.

For example, the EU has included this in its regulatory code (Article 46 UCC) and has also designed a form that is filled online and instantly made available to all customs offices connected. The form is called Risk Information Form (RIF).

Customs authorities communicate the significant risks that require customs control, whether the risk is based on an actual event or on the assumption that the threat exists.

Risks may include financial risk, infringement of intellectual or industrial property, threats to people’s health or security, dual-use products, illicit trafficking of narcotic drugs or drug precursors, tobacco or alcohol smuggling, etc.

The form is also used by a certain country to warn another of alleged irregular movements of goods bound for that country, so that the latter can execute the controls that, for one reason or another, could not be performed by the informing country, or to warn about goods that are supposed to leave the EU through another country but are suspected to remain inside EU territory.

The form also serves the purpose of allowing the exchange of information on risk and risk criteria among EU countries during the implementation of analysis and continual control over priority areas that may affect special customs regimes, certain types of goods, some trading routes, and certain means of transport or economic operators. Customs authorities will conduct these controls in accordance with the principles of urgency and proportionality and after assessing their impact on the economic operators of each country.

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The RIF is a dynamic instrument in the sense that countries feed it with information about the actions taken on the risks exchanged and on the results of these actions.

The WCO envisages a similar type of international cooperation when organizing joint customs operations for specific sectors that aim at managing risks that may threaten those sectors. http://www.wcoomd.org/en/topics/enforcement-andcompliance/instruments-andtools/~/media/DFAAF3B7943E4A53B12475C7CE54 D8BD.ashx During the stages that precede the operational phase, customs authorities prepare an Order of Operations that includes the risk indicators used to determine risk profiles, design the actions to be taken and upload the results into the secure communication platform called CENcomm to send warnings among customs administrations. Equally important is the role of the RILO network, whose 11 offices provide effective coverage throughout all six WCO regions by exchanging operational intelligence and information among customs administrations.

The WCO is promoting security agreements among countries whereby the results of the security controls performed on the consignments in the country of origin are recognized as valid in the country of destination, thus reducing the administrative burden at the time of entry.

The EU has signed agreements that recognize the validity of such controls with Switzerland, Norway and Andorra, and is evaluating new agreements with Japan and Russia.

Also endorsed by the WCO, the EU has entered into a project based on this principle with China (Smart and Secure Trade Lane – SSTL) with the intent of conducting risk analysis based on criteria commonly agreed and for mutually selected operators.

The risk analysis is performed in the country of export prior to the exit of goods, so if any merchandise needs to be controlled, the procedure is executed prior to load47

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ing the goods on the conveyance. The procedure lightens customs formalities at the point of entry (EU, China), as the control operation conducted at the port of export will be already validated.

Japan has expressed an interest in implementing a similar type of agreement.

With regard to security, the United States has entered into two types of bilateral agreements with different countries, which may take the form of a memorandum of understanding between the Foreign Customs Administration and the US Customs and Border Protection (CBP) agency: ď Ž The Container Security Initiative (CSI), which places CBP inspectors at ports located in countries with which agreements are established to identify and control containers that may pose a risk of terrorist acts by preventing the introduction of weapons of mass destruction in containers.

Controls affect exports bound for the United States and are non-intrusive, based on a comparison of the image and the goods declared. ď Ž The Megaports Initiative, which is supported by bilateral agreements with other countries (may take the form of a MOU between customs and the United States Department of Energy) and seeks to deter the illicit traffic of radioactive materials in containerized cargo. https://nnsa.energy.gov/aboutus/ourprograms/nonproliferation/programo ffices/internationalmaterialprotectionandcooperation/-5 In order to facilitate controls, the United States provides technical equipment for the detection of nuclear material during container inspection.

The objective is to inspect as many import, export and transit containers as possible.

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These examples of international cooperation come in response to the security risks that threaten the expansion of the world's economy and have surfaced during the globalization of world trade.

SYNTHESIS OF THE UNIT In this unit we have discussed the need for cooperation and collaboration at different levels to increase effectiveness, maximize synergies between public agencies, and move toward trade facilitation by promoting agreements for the exchange of information and knowledge.

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Complementary Material Please see various website links throughout the training document above.

Bibliography  WCO SAFE Framework of Standards.  WCO website.  European Union website.  Canada Border Services Agency website.  United States – Customs Border Protection website.  United States – Department of Homeland Security website.  National Nuclear Security Administration website.  Government of Barbados website.  US Embassy Trinidad and Tobago website.  ISO 31000 website.  World Trade Organization website.  Treasury Board of Canada website.

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