Customs Risk Management and Selectivity

Definition/Scope

According to Standard 6.3 of the Revised Kyoto Convention (RKC) and the corresponding Guidelines, risk management is defined as the systematic application of management procedures and practices which provide Customs with the necessary information to address movements or consignments that present a risk. The preamble to the RKC lists the application of risk managment as one of seven key principles of trade facilitation embodied in it:

There are five main steps in the standard Customs risk management process as defined by the World Customs Organization: 1 – “Establish Context” : importation of goods, export controls, passenger traffic, etc.; 2 – “Identify Risks”: revenue protection (e.g. under valuation, origin, classification), prohibitions and restrictions (e.g. drug trafficking, IPR, fire arms, etc.); 3 – “Analyse Risks”: likelihood of a risk occurring (less likely, likely, highly likely); 4 – “Assess and Prioritize Risks”: assess impact and consequence of risks occurring (e.g. high, medium, low); 5 – “Address Risks”: define countermeasures and assign to risk levels (e.g.tolerate, treat, transfer or terminate). In addition to these five steps, risk management requires constant monitoring and review in order to eliminate false negative as well as false positive risk assessments. Throughout the process proper documentation, communication and consultation with all relevant stakeholders is key, as risk management is a corporate task involving the entire organization and not one dedicated unit only.

Problem statement

In far too many countries, Customs still applies a 100% physical inspection regime, i.e. every shipment is stopped and physically examined (partially or completely), causing significant delays at border crossings, ports and airports. Such 100% inspection regime also creates an enabling environment for informal payments to speed up the process. According to the Customs Capability Reports published in 2009 by the Global Express Association, only 37 out of 114 administrations surveyed applied a risk-based selectivity approach, 18 examined 100% of all shipments, and the remaining countries selected shipments for inspection randomly or at the sole discretion of the inspection officer.

Implementation guidance

The application of risk management and the use of risk-based selectivity (red/green channel) allows Customs to allocate its scarce resources to the high-risk areas while increasing the efficiency of the clearance process for low-risk shipments. For example, enhancements made to Japan Customs’ risk assessment capabilities since 1999 helped Customs keep the staffing levels nearly unchanged since 1999, while the number of import transactions increased by almost 60 % (2007) and exports transactions increased by around 50% (2007) – see also chart:

By analysing and measuring the level of compliance related to individual traders, commodities or trading countries at the national, regional and local level, Customs can identify those cases in which further scrutiny in the form of physical examiniation and documentary review is necessary and will likely lead to results. By acknowledging the compliance level of a trader, in particular authorized traders and AEOs, leading to a lower inspection rate than that of other less-compliant traders, Customs creates incentives for traders to invest in compliance. In combination with pre-arrival processing of cargo and goods declarations, Customs gains the necessary time for conducting risk assessment and enabling immediate release of the goods upon arrival.

Risk-based selectivity operates more effectively in an automated environment, as computer-based risk-based selectivity can be applied consistently to all imports and exports and is significantly faster and more accurate in comparing a given set of data (e.g. from a goods declaration) against all currently active risk profiles. Also, information technology (IT) can significantly facilitate keeping all existing risk profiles up to date against the latest clearance and audit results. However, the lack of an IT-based risk assessment and targeting system should be no excuse for Customs not to apply this key trade facilitation principle.

Additional information (references, examples, etc.)

The Guidelines to Standard 6.3 of the Revised Kyoto Convention contain a detailed description of the risk management process. The WCO has recently published a detailed risk management compendium, which gives structured guidance on how to establish the organizational environment for successful risk management. Risk management also plays a critical role in a Single Window and cross-border management environment as well as in the area of supply chain security. The ICC Customs Guidelines # 14 also provide relevant business perspectives on aspects of selective examination.