Customs Regulatory Control Study Guide

Overview 

Customs administrations operate in a complex legal environment where international law interacts with domestic law. As an instrument of the executive arm of government, Customs enforces a wide range of domestic laws — powers and responsibilities normally set down in a country's main Customs Act. 

The doctrine of sovereignty allows a state to write its own domestic law as it sees fit. However, this is progressively modified by international instruments designed to create uniformity, simplicity, harmonisation and predictability in the way Customs operates worldwide. International law increasingly determines the role of Customs, the powers it should have, and the extent of its jurisdiction. 

Several international treaties and conventions provide standards specifically for Customs activities. The most important are:  

The WCO Framework of Standards to Secure and Facilitate Global Trade (SAFE), while not a legally binding Convention, provides best practice guidance to secure international trade and promote partnership with industry. SAFE is examined in Module 3. 

Several WTO agreements establish broader trade principles that Customs must also implement. All are founded on the General Agreement on Tariffs and Trade (GATT): 

Learning Objectives  

International Customs law is a collection of treaties and instruments that regulate how Customs agencies exercise their functions at the border. Central to these is the RKC, which sets standards for processing goods and passengers entering and departing a Customs territory. Countries that have acceded to the Convention must incorporate these standards into national law through their Customs Act and any supporting Regulations or Orders. 

More recently, the WTO adopted the Trade Facilitation Agreement, which requires all WTO Members to accept standards for the clearance of goods that are almost identical to the RKC. The WCO Convention on Temporary Admission (the Istanbul Convention) establishes standards for the temporary entry of specific goods for defined purposes, such as exhibitions and events. 

There are many other conventions on particular aspects of Customs work prepared by the WCO and adopted by its members. The most important of these is the Convention on the Harmonized Commodity Description and Coding System (HS Convention), adopted in 1988, which establishes the Harmonized System of tariff nomenclature that now has almost universal application. 

In addition, the WTO has developed several agreements that establish principles relating to international trade which Customs agencies must implement. The most important of these for Customs purposes is the Agreement on Valuation. In addition to the Valuation Agreement, Customs agencies must also implement these WTO agreements: 

The principles set out in all these agreements are founded on the WTO's foundation document, the General Agreement on Tariffs and Trade (GATT). For our purposes here, we focus most closely on the HS Convention and the Valuation Agreement. Full texts and further information on all WCO and WTO agreements are available on their respective websites: WCO Conventions and Agreements and WTO Legal Texts. 

The WTO adopted the Harmonized System Convention in 1988 as the global means for determining the tariff classification of all goods. Its full title is the International Convention on the Harmonized Commodity Description and Coding System. 

The aims of the Harmonized System are to: 

The Harmonized System (HS) is built around a standardised 6-digit code used globally to classify goods, ensuring each product is identified consistently as it is produced, traded, and transported. Its purpose is to replace multiple differing classification systems, allowing all countries and industries to use a single, common framework for identifying goods in international trade. 

The Harmonized System is designed to be a multipurpose nomenclature. Some of the uses envisaged by its authors include being a basis for:  

The current primary function of the Harmonized System is to form the basis for national tariff documents. A large percentage of countries still depend heavily on customs duties for their national revenues, and goods need to be properly classified to ensure correct revenue collection. The Harmonized System forms the basis of the Customs tariffs of more than 200 countries, customs territories and the European Economic Union (EEU), representing approximately 98% of world trade. 

 HS Nomenclature 

The HS Convention consists of 20 Articles and an Annex. The Articles govern the procedures for running the Convention. The Annex has more relevance for everyday use by Customs administrations. The HS Nomenclature is the Annex to the Convention. Under Article 1, it comprises: 

Headings and subheadings are grouped into 97 chapters, which are further divided into 21 sections. Legal notes appear at the beginning of nearly all chapters and some sections. While it is not our intention to examine all 20 Articles, it is worth looking at a few key ones. 

Article 3 specifies the obligations of Contracting Parties. It sets out three distinct points: 

Articles 4 and 5 permit developing countries that are signatories to participate initially in the HS at the 4-digit level only, and to receive technical assistance in adopting the Nomenclature. Partial application does not limit a country to using only the 4-digit headings; it may also elect to use only some of the 5- and 6-digit subheadings if it chooses. 

Article 6 provides for the establishment of the Harmonized System Committee (HSC) and its associated sub-committees or working parties. Under this article, the HSC administers the general running of the HS, while the Review Sub-Committee conducts a systematic review of the structure of the Nomenclature on a regular basis to ensure it keeps up to date with technological developments and changes in trading patterns. 

Article 7 allows for amendments to the HS documents and for the preparation and amendment of supplementary publications such as the Harmonized System Explanatory Notes and the Compendium of Classification Opinions. 

Note

The six digits of an HS code are structured across three levels, Chapter, Heading, and Subheading.

The following image shows a specimen Nomenclature page illustrating how legal notes and classification numbers/descriptions appear in practice. It shows Chapter 18 (Cocoa and cocoa preparations) as an example, with legal notes at the top followed by 4-digit headings and 6-digit subheadings. 

Figure 1: Specimen HS Nomenclature page showing legal notes and classification numbers/descriptions 

Note

The latest version of the Nomenclature was introduced on 1 January 2022 and should now be in force in all Contracting Parties. The next review, originally scheduled for 2025, has been deferred for at least a year and is due to be implemented on 1 January 2028.

 The Harmonized System Committee (HSC) 

The HSC is the primary administrative body responsible for the uniform interpretation and application of the HS. Each Contracting Party has one vote. The exception is EU member states, which collectively hold one vote in the name of the European Economic Community. 

The HSC is also the arbiter of classification disputes between Contracting Parties under Article 10. Where a dispute arises, the parties are first encouraged to reach agreement among themselves. Disputes that cannot be settled directly are referred to the HSC for adjudication at its bi-annual meetings. In the unlikely event that the HSC cannot settle a dispute, it may refer the matter to the WCO Council for a recommendation. Members not satisfied with the result have the right to appeal. 

Continuous Updating of the HS 

The HS has a built-in system of continuous amendment, essential because internationally traded goods are constantly changing — whether because of shifting demand or technological progress. The HS operates on a five-year review cycle. Each cycle may examine the Nomenclature as a whole, focus on certain sectors, or address particular areas — for example, a review period may focus on heavy machinery classifications or computer-related equipment. The review process is intensive and involves detailed submissions and consultations between the HSC and its sub-committees. Since its inception, the HS has undergone six major reviews. The sixth (current) version was implemented on 1 January 2022. The next review, originally scheduled for 2025, has been deferred for at least a year and is due on 1 January 2028. 

Harmonized System Explanatory Notes (HSEN) 

The HSEN are the largest and most important supplementary publication produced by the HSC. Although they do not form an integral part of the HS Nomenclature, they are the official interpretation of the HS structure and complement the legal text. The HS Convention and the HSEN will be studied in much more detail later in the course to assist you in classifying goods in accordance with the HS Tariff. 

Both the WTO and the WCO have a Valuation Committee — the WTO to focus on policy and law; the WCO to focus on the practical application of the Agreement and to provide guidance to Customs administrations on its proper implementation. Later in this course, we will cover valuation in much more detail in Module 7. 

Both the WTO and the WCO have a Valuation Committee – the WTO to focus on policy and law; the WCO to focus on the practical application of the Agreement and to provide guidance to Customs administrations on the proper implementation of it. 

In 2013 the WTO adopted the Agreement on Trade Facilitation. It entered into force in 2017, and all WTO Members are bound by it although some developing countries have been granted extended timeframes in which to give effect to it in national legislation. 

The TFA is largely consistent with the RKC and adopts the same principles, but it is not as comprehensive or detailed. The critical difference is that all its provisions are mandatory and legally binding. A WTO Member that fails to implement the TFA may find itself before a WTO dispute settlement body. The full text of the Agreement is available at WTO Trade Facilitation Agreement. 

Key articles of relevance in your work include: 

Authorised Operators (AO) 

Article 7, paragraph 7 of the TFA is worth examining in depth — not least because DHL is a strong supporter of the concept. The language of paragraph 7 builds on Transitional Standard 3.32 of the General Annex to the RKC. It is also aligned with, but separate from, the Authorized Economic Operator (AEO) scheme established by the WCO through the SAFE Framework of Standards for Supply Chain Security, which we examine in Module 3. 

The main purpose of Article 7, paragraph 7 is to mandate the introduction of AO schemes by all WTO Members, unless the procedures promoted by the scheme are already available to all importers and exporters. Under the scheme, Customs must provide at least three of the following measures: 

Companies seek accreditation through a self-assessment process, subsequently verified by Customs. Under Article 7.2, the applicant must demonstrate high levels of compliance with Customs procedures, both in their past record and as a commitment going forward. 

Article 7.5 provides the legal basis for Mutual Recognition Agreements (MRAs), under which one country recognises the AO status of a company granted that status in another country. These are bilateral agreements, and there is already a growing network of these arrangements. The WCO reports that there are now 97 MRAs in existence. These give effect to the WCO's AEO scheme, but most will include provisions covering the AO scheme as well. Australia, for example, has 14 MRAs in place to allow its Trusted Traders to be recognised in other countries. For a full list of countries with MRAs, visit the WCO Authorised Economic Operator Compendium  

In some jurisdictions, such as the EU, the AO and AEO concepts are kept separate — companies may be accredited as AOs, AEOs, or both. In many other countries, the two schemes have been brought together, as in Australia's Trusted Trader Scheme.

Overview 

Customs administrations globally are grappling with the challenge of ensuring compliance with their laws in a rapidly changing world of new and emerging technologies, heightened commercial imperatives and changing social expectations. In this part of the module, we examine and analyse contemporary methods of regulatory compliance management that are successfully meeting these challenges. In many respects, this means giving full effect to the agreements we looked at in Part 1. 

Four essential tasks of customs 

The way Customs conducts these tasks directly affects the movement of internationally traded goods. Comprehensive, transparent legislation, policies, and procedures are essential to minimize unnecessary intervention. 

Customs authorities are generally responsible for managing border administrative arrangements for matters for which other government departments and agencies have policy responsibility, such as health, immigration, agriculture, environment, and trade statistics. 

Customs achieves this through a range of control systems that enforce regulatory requirements at import and export points. These border control responsibilities originate from Customs’ traditional role of collecting duties on traded goods and have expanded to include collecting other taxes such as excise, Value Added Tax (VAT), and Goods and Services Tax (GST). 

In countries where import duties and related taxes represent a significant proportion of national revenue, the principal focus of Customs tends to be revenue collection. Where this is not the case, the principal focus is likely to be border protection — with particular emphasis on the enforcement of import and export prohibitions and restrictions, including restrictions arising from multilateral and bilateral trade agreements. Most developed economies are now placing increasing emphasis on border security, with Customs playing a key role.  

All Customs administrations operate across three interconnected roles simultaneously: 

Note

The international trading community is increasingly pushing Customs authorities to focus more on trade facilitation, meaning fewer delays and less direct intervention in business activities. This shift is driven by rapid changes in global trade, including advanced technologies and highly interconnected markets, which require faster and more efficient cross-border processes.

Learning Objectives  

Regulatory agencies are needed to make sure laws are followed in real-world conditions. Although they wouldn’t be necessary if everyone fully understood and complied with their legal obligations, in practice people may make mistakes or choose not to comply. Therefore, governments rely on regulators to oversee, support, and enforce compliance with laws and regulations. Here, then, are three important roles for regulators: 

Effective application of the principles of risk management is the key to achieving such a balance.

Best practice in goods clearance is established by two key international frameworks: 

The RKC incorporates important concepts of contemporary compliance management — including the application of new technology, new philosophies on Customs control, and the establishment of partnership agreements between Customs authorities and private sector organizations. 

Central to the governing principles of the RKC, and reinforced by the TFA, is a required commitment by Customs administrations to provide transparency and predictability for all those involved in international trade. In addition, administrations are required to: 

These elements of compliance management are found primarily in Chapter 6 of the General Annex to the Revised Kyoto Convention available at RKC General Annex Chapter 6. There are ten broadly worded standards there, under the general heading of Customs control. Fundamental to all ten is the application of risk management. 

Note

These are principles that have global acceptance.

We will now focus on understanding how risk management is applied in practice, specifically in line with the Revised Kyoto Convention (RKC), the Trade Facilitation Agreement (TFA), and internationally recognised ISO standards. 

Customs use of risk management 

Customs compliance management is based on risk management. It directs resources to areas that may affect Customs objectives and improves efficiency. Agencies use risk assessment and selectivity to identify likely breaches of the law. 

Risk management can be applied in manual or automated environments, but automated systems are far more effective: 

The Revised Kyoto Convention requires systematic risk management, with modern systems such as ASYCUDA World supporting its practical application. 

DPDHL use of Risk Management 

Like Customs, DPDHL does not want its network to be used by dishonest customers. The use of risk management, including risk profiles, is therefore equally relevant to DPDHL operations as it is to Customs activities. 

A profile should be thought of as a tool that can provide a 'picture' of a non-compliant trader, undervalued consignment, smuggling method, and so on. Many non-compliant shipments have common characteristics, and looking for these characteristics makes it more likely that high-risk consignments or customers will be identified. 

Profiles, when properly developed and used, are very effective in identifying potential non-compliance. To remain effective, however, profiles must be continually updated as new information becomes available. Profiles should not be regarded as totally effective — many seizures of illegal contraband have been made that do not fit any established profile. 

Generally, high-risk situations usually involve several indicators. The more indicators present, the higher the risk. Risk management relies on selectivity, profiling, and targeting. Selection criteria for dutiable goods include the parties' histories, the goods' origin and route, and any applicable restrictions. 

Risk indicators are specified selectivity criteria such as: specific commodity code, country of origin, country whence consigned, licensing indicator, value, trader, level of compliance, type of means of transport, purpose of the stay in the Customs territory, financial consequences, or financial situation of the trader/person. 

Risk profiling is the means by which Customs puts risk management into practice. It replaces random examination of documents and goods with a planned and targeted working method, making maximum use of Customs resources. A risk profile should contain: 

Once established, the profiles along with other information and intelligence will provide a basis for targeting potentially high-risk movements of consignments, means of transport, or travelers. 

In the following pages we examine three case studies on the use of risk management. They show that proper risk management can make for a much more cooperative and effective compliance process. 

The case studies below have been adapted from the WCO Customs Risk Management Compendium and provide a snapshot of the experience of two Customs administrations as they modified their systems and processes and incorporated a Risk Management Framework to underpin their core functions. 

Through the application of risk management techniques and modern practices supported by improved Information Communication Technology (ICT), the implementation of the Automated System for Customs Data (ASYCUDA World) in 2016 centralized the JCA’s operations and created a coordinated approach to risk management across border regulatory agencies. 

 Implementing a risk management framework has delivered measurable improvements across every dimension of the JCA’s operations — for traders, passengers, and the Agency itself: 

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: 

 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: 

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.  

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. 

Professor Widdowson (2020) summarises this framework as follows: 

In essence, the framework is based on the legislation and associated processes and procedures which represent the regulatory requirements for which Customs has administrative responsibility. This includes all aspects of their direct regulatory responsibilities, including the import, export and transit of goods, as well as any matters that are administered on behalf of other agencies, such as health, agriculture, taxation, environment, statistics and in some cases, immigration. In order to ensure compliance with such requirements, there is firstly a need to make certain that members of the trading community are aware of their rights and responsibilities, by providing them with the necessary information and support to comply.

It is then necessary to assess levels of compliance through the use of various techniques such as data screening, documentary checks, non-intrusive inspection, audit and investigation, the result of which will be the identification of either compliance or non-compliance. Where non-compliance is identified, the reason for non-compliance must be established by assessing the relevant risk, leading to the identification of appropriate risk mitigation strategies, which may involve revisiting the legislative base, processes and procedures, information and support, or compliance assessment techniques, or may require some form of enforcement action.

In situations where compliance is identified, the appropriate response is to actively recognise the compliant behaviour. In practice, the level of compliance identified will form part of a continuum from criminal behaviour and fraud through to voluntary compliance. The relevant response will therefore depend on the trader’s position on the compliance continuum. Enforcement strategies for identified non-compliers include warnings, penalties and other sanctions, while recognition strategies for compliers include increased levels of self-assessment, reduced regulatory scrutiny, and increased levels of facilitation.

 Let us look at each of these aspects of the model in a little more depth. 

Legislative base 

The risk to be managed by any government agency is the risk to the achievement of its fundamental objective — that is, the risk of non-compliance with the laws for which it has administrative responsibility. Since the primary role of Customs administrations is to ensure compliance with the law, the starting point in any regulatory regime must be the establishment of an appropriate legislative framework. 

Legislation exists to give effect to government policy. It must reflect accurately the wishes of the government, the policy intent, and the international obligations taken on by the government.  The legislation must also fully support the customs compliance strategy. 

For example, where the strategy is based on a self-assessment regime, with compliance measured through post-transaction audit, the legislation must support that approach. It will require some or all of the following elements: 

There is considerable guidance provided by the RKC, the HS Convention, the SAFE Framework of Standards, the Valuation Agreement and the Trade Facilitation Agreement — all of which inform the content of Customs legislation and of the Regulations that support and expand the legislation. As well as providing detailed guidance on matters such as tariff, valuation and clearance procedures, they also provide guidance on the nature of Customs legislation, which is to be clear, simple and accessible. 

Processes and Procedures 

The next section of the Framework expands and supports the legislative base by providing the practical detail on how the law is to be applied, and how those regulated by the law can be compliant with it. As Professor Widdowson's (2020) article explains: 

Information and support 

Customs has a responsibility to ensure that the international trading community has a clear understanding of its rights and responsibilities. There is a need for people to know what the rules are — if they do not, how can they be expected to comply? Customs authorities are increasingly recognising the need to provide meaningful advice to those being regulated. This is often referred to as a policy of 'informed compliance', which involves the use of a range of 'client service' initiatives designed to ensure that those being regulated know what the rules are. 

The manner in which regulatory requirements are publicised will vary depending on the circumstances, but a logical starting point is to provide comprehensive information on the administration’s website. This should include, as a minimum, the legislation itself; details of any rulings, decisions and determinations that help inform the way in which the law is interpreted; a clear overview of relevant processes and procedures; administrative guidelines and explanatory material such as factsheets that serve to clarify such processes; and details of where further information may be obtained, including available learning packages. (Widdowson 2020). 

The need for assistance to traders also underpins the Trade Facilitation Agreement, and the wealth of explanatory materials provided by the Harmonized System Committee are designed to assist traders and brokers to apply the classification rules of the HS Convention correctly. 

Compliance assessment 

The modern Customs service has a wide range of compliance assessment tools available to exercise Customs control in accordance with Chapter 6 of the General Annex. Because Customs has a responsibility to enforce the law, it must determine whether those being regulated are complying with the law. 

During this process, other documents directly linked to the cargo being cleared may be called for to validate the authenticity and correctness of the declaration. These documents may include packing lists or documents related to the trade transaction, such as orders, contracts or conditions of payment. Review of these documents may clarify questions arising from the initial documentary examination. 

Physical examination/search 

If the documentary review indicates that the movement is satisfactory and no discernible risks are present, a physical examination is not normally necessary. If the documentary check indicates a need for physical examination, the extent of that examination will depend on the type of goods and the suspected Customs offence. 

The physical examination of goods and the search of commercial means of transport are undertaken to verify the nature and/or the relationship between the goods/means of transport and the documents presented. Customs authorities may also carry out checks to ensure that the means of transport fulfil technical conditions laid down by certain international agreements for the international transport of goods. Where exercised, such physical examinations or searches should be carried out as rapidly as possible. 

There are two levels of physical examination: 

The level and nature of physical examination should be determined by the information available on the consignment, the Customs procedure under which the goods are declared, provisions in international agreements, and any special nature of the goods (e.g., perishable cargo, live animals, dangerous goods, jewels, antiques, works of art, etc.). Other relevant factors include urgency, location, and the resources available to conduct the examination. If it is not possible during the physical examination to determine the tariff classification of the goods, samples may be drawn in order to expedite the release of the goods. 

Identification of goods 

To allow goods subject to certain Customs procedures — e.g., transit, transshipment, temporary admission, warehousing, inward processing, etc. — to enter or move through the Customs territory without paying duties and taxes, specific measures are required to ensure their identification. These measures may include affixing seals, stamps, perforations or identification marks, describing the goods, or making reference to samples, plans, sketches, or photographs. 

In cases of temporary storage, warehouses or free zones, Customs may require the trader to identify the type of goods being stored as well as the location of the storage facility. Such facilities should be appropriately secured and supervised, and in all cases, Customs will retain the right to enter and examine the facility and take stock of the goods periodically. 

Audit 

A common form of compliance assessment in any regulatory environment is through the use of audit. There are a number of different audit approaches available to Customs, including desk audits, transaction-based audits, and systems-based audits. The nature of the potential risk identified by Customs when selecting a company for audit will generally dictate the approach adopted. 

Desk audits are generally used to further examine an unusual transaction that falls outside established parameters or normal patterns for a particular type of company or transaction. The desk audit approach may simply involve contacting the company concerned and asking it to provide additional information to support the data declared in the transaction — for example, commercial documentation to support a declared value, such as invoices, contracts and trade catalogues. 

Transaction-based auditing involves testing transactions identified as a potential risk. This approach is often used for small traders, such as those who import goods on an infrequent basis. Auditors verify information provided by the company by referral to all available related documentation — for example, comparing import declarations against company purchase orders, buying or selling contracts, suppliers' invoices, bills of lading, air waybills, bank statements or guarantees. 

Enforcement and recognition strategies are designed to address identified non-compliers and recognised compliers. For identified non-compliers, there is a range of enforcement strategies. For recognised compliers, strategies include increased levels of self-assessment, reduced regulatory scrutiny, less onerous reporting requirements, periodic payment arrangements, simplified procedures, and increased levels of facilitation. This approach is reflective of a compliance improvement approach, the principal focus of which is the achievement of future compliance and ensuring that an appropriate balance exists between incentives for compliance and sanctions for non-compliance. 

An effective compliance management strategy seeks to find the cause of non-compliance and identify ways of preventing its recurrence. This is achieved through the application of the risk management process, the key elements of which are shown in Figure 2 below. 

Figure 2: Risk management process | Source: Modified from ISO 31000 (ISO, 2018) 

Context and scope 

The context and scope of the risk being managed is defined by the context and scope of the audit (or other compliance assessment activity) itself. For example, the audit may be focusing on a trader's compliance with Customs requirements in general, or with particular aspects of the regulations such as those relating to transit, export or warehousing activities. 

Risk identification 

Risk identification — the first step of the risk assessment process — essentially involves answering two questions: 

The first question helps clarify the nature of risk; the second provides valuable information about potential causes.  

Note that the error identified during the course of the audit has already answered the first question. The next task is to determine how and why the error has occurred — for example, whether the company made an inadvertent error, whether its procedures are flawed, whether there is a general misconception within the industry sector, or whether the error resulted from an intentional act. On the other hand, the legislation may be unclear, or the administrative requirements may be ambiguous. 

Risk analysis and evaluation. 

The next step is to analyse the risk by considering two discrete elements — the likelihood of the risk occurring, and the impact if it does in fact occur. The impact of a risk occurring is relatively easy to quantify in the context of revenue compliance; in other situations, there is generally a need to make qualitative assessments — for example, failure to obtain import or export permits. Determining the likelihood of a risk occurring depends on two factors: those which Customs can control, and those which it cannot. When examining these factors in a criminal context, the effectiveness of existing controls is often referred to as 'vulnerability', whereas the factors over which Customs has little or no control are referred to as the 'capability' and 'intent' of the criminal organisation. In the intelligence community, the assessment of capability and intent is generally referred to as a threat assessment. 

Both the likelihood and impact of a risk are considered when determining the overall level of risk. This leads to the risk evaluation stage, which involves determining whether a risk is acceptable or unacceptable, and how the unacceptable risks are to be prioritised. 

Risk treatment 

Having identified the risks that require mitigation, the next step is to identify effective strategies that will eliminate or minimise the likelihood of the risk recurring, its potential impact, or both. The appropriate mitigation strategy will depend on how or why the risk occurred. It may be necessary to address systemic problems within the company, to review the administration's published guidelines, or to provide formal clarification of the law through binding rulings. As such, one or more stages of the Integrated Compliance Management Framework will need to be reviewed. 

The WCO Customs Risk Management Compendium contains a wealth of practical information to assist administrations to assess risk and identify effective risk mitigation strategies. The compendium includes guidance on developing an organisational framework for managing risk; embedding risk management in the organisational culture; risk assessment, profiling and targeting; risk indicators; and guidelines for intelligence analysis. 

Enforcement 

In the process of assessing compliance, Customs authorities will encounter two situations: compliance and non-compliance. The non-compliance spectrum will range from innocent mistakes to blatant fraud. If the error nears the fraudulent end of the spectrum, some form of sanction will need to apply, including administrative penalties or, in the more severe cases, prosecution and licence revocation. 

Before determining the need for or nature of a sanction, Customs should identify the true nature of the risk by establishing the root cause of the error. The error may be the result of a control problem within the company, due to flawed systems and procedures, or it may be the result of a deliberate attempt to break the law. On the other hand, the relevant legislation may be unclear, or the administrative requirements may be ambiguous. 

The mitigation strategy adopted will depend on the nature of the identified risk. Unless the error is found to be intentional, Customs will typically seek to systemic problems within the company, or provide the company (or an entire industry sector) with advice on compliance issues, or provide formal clarification of the law through binding rulings or other means. 

It is important to recognise that different solutions will be used to address honest mistakes on the one hand, and deliberate non-compliance on the other. Industry familiarisation seminars and information brochures may adequately address errors that result from a lack of understanding of the relevant regulatory provisions. However, if someone is actively seeking to commit fraud, seminars and information brochures will have absolutely no impact on their activities. Indeed, such members of the trading community are likely to have a very good understanding of their obligations and entitlements. To treat the risks posed by such organisations, Customs is likely to adopt a rigorous enforcement approach. 

Recognition 

A finding of compliance by the audit team is a legitimate and useful operational outcome. For every instance of compliance identified, the population of potential non-compliers reduces. It is now widely accepted that traders who can demonstrate high levels of compliance require a lower level of scrutiny than those with a history of poor compliance, or those about which little is known. There is also an increasing realisation that compliant behaviour should not only be recognised through a reduction in regulatory scrutiny, but through various forms of positive reinforcement. 

The concept of recognising trusted traders has evolved from a single RKC standard into a binding international obligation: 

Potential Benefits for Authorized Operators

TFA Article 7(3) lists the following benefits that WTO members shall provide to Authorized Operators — in each case, “as appropriate” to their context: 

The SAFE Framework formally recognises the need to provide benefits to compliant companies in the context of its AEO concept. Authorized Economic Operators are expected to benefit from faster processing of goods by Customs, e.g. through reduced examination rates. These processes will ensure that AEOs see a benefit to their investment in good security systems and practices, including reduced risk-targeting assessments and inspections, and expedited processing of their goods. The WCO further specifies that such benefits should be clear, tangible and documented in order to provide members of the trading community with an incentive to seek AEO status, and to justify the costs incurred in achieving such. As such, the WCO provides a formal link between a trader's low risk rating and the provision of regulatory benefits. 

Note

It is worth noting here that the concept of Authorized Operators is different from the concept of Authorized Economic Operators as proposed in the SAFE Framework, which we will look at in Module 3.

This module has examined the main treaties governing how Customs administrations approach trade facilitation, revenue management and Customs control. These agreements establish standards designed to achieve a sound balance between facilitation and compliance — ensuring that legitimate trade can proceed with minimal intervention, while illicit trade is prevented and penalised appropriately. 

The foundation of this approach is risk management. Customs supports voluntary compliance by providing information and services to traders, while applying appropriate penalties for non-compliance — whether through genuine error or deliberate intent. This has fundamentally transformed Customs administrations over the past 30 years, though implementation continues as more countries accede to the RKC and the TFA and align their domestic law with modern requirements. 

The agreements examined in this module do not, however, address supply chain security in depth. Module 3 will examine the practices and procedures developed since 2001 to protect the supply chain from terrorism and other hostile threats.

European Express Association, The Customs Strategy, https://www.euroexpress.org/e-library/position-papers. 

Government of Australia. Australia – United States Free Trade Agreement, 2005. Canberra, 2005. Viewed 26/10. /2006.  https://www.dfat.gov.au/trade/agreements/in-force/ausfta/Pages/australia-united-states-fta 

Global Express Association 2010, GEA and Trade Facilitation, https://global-express.org/index.php?id=14  

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Widdowson, David, Managing customs risk compliance: an integrated approach (2020). World Customs Journal Volume 14, Number 2 

World Customs Organization, International Convention on the simplification and harmonisation of customs procedures, (Revised Kyoto Convention), General Annex Guidelines, rev. edn, Ch 1. World Customs Organization, Brussels, 1999. 

World Customs Organization, Framework of Standards to Secure and Facilitate Global Trade. The World Customs Organization, Brussels, 2005 

World Customs Organization, The ATA System. An Instrument for Promoting International Trade. World Customs Organization, Brussels, 2006. http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/facilitation/instruments-and-tools/conventions/ata/pf_ata_brochure.pdf?la=en 

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World Customs Organization, Immediate Release Guidelines, Brussels, 03/2006