Customs Regulatory Control Study Guide

3. Part 2: Customs Compliance Management

3.5. Customs Compliance Management Framework

Reading 1

Widdowson, D. (2020). Managing Customs Risk and Compliance: An Integrated Approach. World Customs Journal, 14(2), 63–80. https://doi.org/10.55596/001c.116418

To view, please click on the following link: https://www.worldcustomsjournal.org/article/116418-managing-customs-risk-and-compliance-an-integrated-approach

Risk management allows administrations to direct resources towards areas that have the potential to impact on the achievement of their objectives and assists in maximising the effectiveness and efficiency of the organisation. Risk management is nothing new, and the vast majority of Customs administrations have in place some form of risk management procedures or guidelines, either formal or informal. For example, Customs officers do not check every passenger, consignment or transaction. Indeed, it is neither possible nor desirable to individually examine, check, or approve all relevant activities and transactions.

A Risk-Based Customs Culture

Tom Hayes, a former Comptroller-General of Australian Customs and former Secretary-General of the WCO, was an early proponent of the need for Customs authorities to reconsider their traditional approach to international trade control. In an address to the 1993 Pan-Asian EDI Summit in Kuala Lumpur, Malaysia, he used an analogy contrasting the role of gatekeeper with that of the village policeman, and in so doing, he popularised the term 'gatekeeper' to describe the control-focused Customs enforcement strategies that have traditionally been employed by Customs authorities:

Basically, the policeman makes it his business to know what is going on in the village. He collects a constant stream of information about the life of the villagers by observation and by communication with individuals … If he is a good policeman, he will sense trouble before it arises, and he might even take the step of delivering a warning. From time to time the policeman will fail to deter someone from committing an offence. When that happens his intimate knowledge of the affairs of the village will help him to gather evidence quickly and efficiently.

The table below contrasts the two approaches:

Traditional ‘Gatekeeper’ Style	↔	Risk Management Style
Legislative Framework
Legislative base provides for a ‘one size fits all’ approach to compliance management	↔	Legislative base provides for flexibility and tailored solutions to enable relevant risk management & administrative strategies to be implemented
Onus for achieving regulatory compliance is placed solely on the trading community	↔	Legislative base recognises responsibilities for both government & the trading community in achieving regulatory compliance
Sanctions for non-compliers	↔	Sanctions for non-compliers
Administrative Framework
‘One size fits all’ compliance strategy		Strategy dependent upon level of risk
Control focus		Balance between regulatory control and trade facilitation
Enforcement focus		Dual enforcement/client service focus
Unilateral approach		Consultative, cooperative approach
Focus on assessing the veracity of transactions		Focus on assessing the integrity of trader systems and procedures
Inflexible procedures		Administrative discretion
Focus on real-time intervention and compliance assessment		Increased focus on post-transaction compliance assessment
Lack of/ineffective appeal mechanisms		Effective appeal mechanisms
Risk Management Framework
Indiscriminate intervention or 100% check		Focus on high-risk areas, with minimal intervention in low-risk areas
Physical control focus		Information management focus
Focus on identifying non-compliance		Focus on identifying both compliance and non-compliance
Post-arrival import clearance		Pre-arrival import clearance
Physical control maintained pending revenue payment		Breaks nexus between physical control and revenue liability
No special benefits for recognised compliers		Rewards for recognised compliers

Figure 1: Compliance Management Styles Adapted from David Widdowson, 2004, p95

The international instruments introduced in Part 1 are all designed to help Customs transition from the gatekeeper model to the village policeman model — in a way that strengthens rather than diminishes Customs' ability to ensure compliance with the law. Customs is both a regulatory agency and a law enforcement agency, and as such has a broad range of compliance techniques available to it.

Introduction to Compliance Management

Chapter 6 of the RKC relates specifically to Customs control. It reinforces the view that Customs should place greater emphasis on risk-managed controls. The RKC states:

Customs administrations have to apply efficient and effective controls by implementing risk management techniques, in order to simultaneously fulfil the responsibility to collect revenue, implement trade policy, safeguard the public, manage the increase in world trade and tourism, reduce Customs personnel and offer trade facilitation to legitimate traders, travellers and carriers.

Customs administrations should shift from exclusive movement controls to more audit-based controls, e.g. from the introduction of simplified procedures to authorisation for trader self-assessment. This will enable Customs to manage the growth in world trade, and the increasing demand to reduce resources, as well as the need for greater trade facilitation; and

Customs administrations today are required to provide extensive facilitation while maintaining control over the international movement of goods, means of transport and persons. The level of risk is determined in the context of the priorities of the Customs administrations e.g. whether the priority is collection of duties and taxes or checking prohibitions and restrictions or any other specific area that has been identified (Section 6. Risk Management in Customs)

A risk-managed approach to compliance is characterized by the identification of potential risks, with resources directed towards high-risk areas and minimal intervention in low-risk areas. Such regimes adopt strategies that break the nexus between physical control over goods and a trader's revenue liability, and permit Customs clearance to be granted prior to the arrival of cargo.

Another element of a risk-based approach is the acceptance that one size does not fit all.

01 Identify and target Risk

Potential risks are identified and resources directed towards high-risk areas, with minimal intervention in low-risk areas.

02 Break the physical control nexus

Strategies break the link between physical control over goods and a trader’s revenue liability, allowing pre-arrival clearance.

03 Context-specific application

Different methods are used to enforce the same law depending on circumstances, greater discretion given to regulatory authorities.

While Customs has a fundamental responsibility to ensure that statutory requirements are met, the manner in which this is achieved is often flexible. For example, the law may require that certain goods may only be imported under license. However, the manner in which licensing arrangements are implemented by the administering agency is often open to administrative discretion. A license may, for example, be issued on a transaction-by-transaction basis, on a periodic basis (e.g. six or twelve months), or for an indefinite period provided certain conditions are met.

The distinction between statutory and administrative requirements is an important one, particularly in the context of organizational flexibility and change management. The potential for change, the processes and stakeholders involved in effecting change, and the timeframe in which change may be achieved differ markedly depending on whether the requirement is for a change to statutory provisions or to administrative procedures. When examining the concept and principles of regulatory compliance management, it is therefore important to consider potential administrative solutions that may not be specifically identified in national legislation but are nevertheless fully consistent with the relevant legislative provisions.