Managing Risk in the Customs Context

Author:David Widdowson

The Importance of Managing Risk. Facilitation and Control. Achieving a Balanced Approach. Managing Compliance. Putting the Theory into Practice. Compliance Assessment and Trade Facilitation. Risk Management: An Example. Conclusion. References.


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In recent years the international trading environment has been transformed dramatically in terms of the manner in which goods are carried and traded, the speed of such transactions, and the sheer volume of goods now being traded around the globe. This, together with mounting pressure from the international trading community to minimize government intervention, has caused customs authorities to place an increasing emphasis on the facilitation of trade.

In an effort to achieve an appropriate balance between trade facilitation and regulatory control, customs administrations are generally abandoning their traditional, routine "gateway" checks and are now applying the principles of risk management, with varying degrees of sophistication and success.

This chapter examines the basic principles of risk management and identifies practical ways of putting the theory into practice. The first section discusses the importance of managing risk in customs. The second section examines the two key objectives of customs-facilitation and control. The third section identifies risk management as the means of achieving a balanced approach to facilitation and control. The fourth section deals with managing compliance and describes a risk-based compliance management strategy. The fifth section concentrates on putting the theory to practice and thus draws together the various elements of a risk management style to provide a structured approach to the management of compliance. The sixth section links compliance assessment with trade facilitation. The next section provides an example of risk management. The final section summarizes the chapter's main conclusions.

David Widdowson is Chief Executive Officer, Centre for Customs and Excise Studies and Adjunct Professor, School of Law, University of Canberra, Australia.

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The Importance of Managing Risk

The concept of organizational risk refers to the possibility of events and activities occurring that may prevent an organization from achieving its objectives. Customs authorities are required to achieve two primary objectives-provide the international trading community with an appropriate level of facilitation, and ensure compliance with regulatory requirements. Risks facing customs include the potential for noncompliance with customs laws such as licensing requirements, valuation provisions, rules of origin, duty exemption regimes, trade restrictions, and security regulations, as well as the potential failure to facilitate international trade.

Customs, like any other organization, needs to manage its risks. This requires the systematic application of management procedures designed to reduce those risks to ensure that its objectives are achieved as efficiently and effectively as possible. Such procedures include the identification, analysis, evaluation, treatment, monitoring, and review of risks that may affect the achievement of these objectives.

Sound risk management is fundamental to effective customs operations, and it would be true to say that all administrations apply some form of risk management, either formal or informal. Drawing on intelligence, information, and experience, customs has always adopted procedures designed to identify illegal activity in an effort to reduce its risks. The more traditional procedures include physical border controls over the movement of goods and people consisting of documentary checks and physical inspections aimed at detecting illicit trade. The introduction of such controls constitutes a form of risk management, but not necessarily an effective or efficient one.

Recently, the increasing complexity, speed, and volume of international trade, fueled by the technological advances that have revolutionized global trading practices, have significantly affected the way customs authorities carry out their responsibilities. As a consequence, many administrations have implemented a more disciplined and structured approach to managing risk. This has also helped them to increase the efficiency of their operations and to streamline their processes and procedures, minimizing intervention in trade transactions and reducing the regulatory burden on the commercial sector.

Facilitation and Control

The two key objectives of customs are commonly referred to as "facilitation" and "control." In seeking to achieve an appropriate balance between trade facilitation and regulatory control, customs must simultaneously manage two risks-the potential failure to facilitate international trade and the potential for noncompliance with customs laws. The application of risk management principles provides the means of achieving this balance.

Note that the phrase "facilitation and control" has been used in this context, rather than the phrase "facilitation versus control." It is a commonly held belief that facilitation and control sit at opposite ends of a continuum, and it is not uncommon for commentators to refer to the apparent "paradox" of achieving both facilitation and control. It is often assumed that, as the level of facilitation increases, the level of control decreases. Similarly, where regulatory controls are tightened, it is commonly assumed that facilitation must suffer. This is an extremely simplistic view, as it assumes that the only way a process may be facilitated is by loosening the reins of control. Such a contention is fundamentally flawed, because the concepts of facilitation and control represent two distinct variables, as depicted in the matrix in figure 5.1.

The top left quadrant of the matrix (high control, low facilitation) represents a high-control regime in which customs requirements are stringent, to the detriment of facilitation. This may be described as the red tape approach, which is often


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representative of a risk-averse management style. In most modern...

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