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Explain the concepts of the compliance pyramid and the compliance continuum

Answer the two questions below. Answers should not exceed 250 words.

  1. Explain the concepts of the compliance pyramid and the compliance continuum. Illustrate your answer with diagrams of both models
  2. Discuss the range of compliance techniques available to the ABF to monitor and enforce importers’ compliance with the Customs Act.

Article 1


CUSTOMS AND BORDER CONTROL

RISK AND COMPLIANCE MANAGEMENT TRAINING PROGRAM

TOPIC FIVE:
Verification, Enforcement and Sanctions

Study Guide July 2020

© Prepared on behalf of the Border Protection Service by the Centre for Customs & Excise Studies, Canberra, ACT 2601 Australia.

Contents

Topic 5: Verification, Enforcement and Sanctions………………………………………………………………………. 4 Leverage Exercise……………………………………………………………………………………………………………….. 4 Audits ……………………………………………………………………………………………………………………………….. 6

Document retention and production…………………………………………………………………………………. 6 Desk audits……………………………………………………………………………………………………………………..6 Transaction-based audits………………………………………………………………………………………………….7 Systems-based audits………………………………………………………………………………………………………. 7 Prudential Audit ……………………………………………………………………………………………………………… 8

Compliance Enforcement…………………………………………………………………………………………………….. 8 Sanctions …………………………………………………………………………………………………………………………… 8 Sanctions and International Law……………………………………………………………………………………….. 9 RKC: General provisions………………………………………………………………………………………………….10 RKC: Specific Annex H ……………………………………………………………………………………………………. 10 Administrative Settlement of Customs Offences………………………………………………………………..11 Reviews and Appeals …………………………………………………………………………………………………………12 Rights of Appeal ……………………………………………………………………………………………………………. 12 Compliance in the Australian Border Force ………………………………………………………………………….. 12 The Infringement Notice Scheme ……………………………………………………………………………………. 12 Summary …………………………………………………………………………………………………………………………. 13 Resources Available on Moodle………………………………………………………………………………………………14 Revised Kyoto Convention ……………………………………………………………………………………………… 14

Topic 5: Verification, Enforcement and Sanctions

We now come to the third and fourth tiers of the Compliance Management Pyramid. The third tier deals with compliance assessment. (Tier four, dealing with enforcement and recognition we will come to later.) The various forms of compliance assessment that are available to regulators are designed to identify whether a trader, company, transaction, etc., is in compliance with the law and, if not, what is the appropriate sanction to be imposed. A risk-based approach to compliance assessment ensures an appropriate balance between Customs intervention and trade facilitation. For example, even if a physical inspection of goods is required, Customs should, to the extent possible, use non-intrusive inspection techniques. And while it may be necessary (for risk-based reasons) to undertake an examination or analysis of goods at the time of importation, the majority of compliance assessment activities can generally be undertaken on a pre-arrival or post-transaction basis, thereby contributing to the Customs objective of facilitating legitimate trade.

None of what follows in this section of the Topic should be taken to suggest that real time cargo exams, real time document checks, analysis of goods, taking of securities and other traditional Customs compliance functions do not still have a place in the Customs armoury. They do, and when used wisely can greatly assist compliance. But we also need to understand that in a world where trade facilitation is an important economic tool of Government, measures which disrupt the smooth flow of goods across the border are not always desirable or helpful. When to stop cargo for inspection is a decision to be made in the proper exercise of Customs control – but often a post-transaction review of that shipment may be the better option for assessing compliance. The thrust of the Revised Kyoto Convention and of the Trade Facilitation Agreement are for minimal real-time intervention by Customs, and smart post-transaction auditing to verify compliance.

We are going to focus primarily on issues of revenue and trade facilitation, rather than passenger clearance or the identification of prohibited goods. But the approaches we discuss are equally relevant in the passenger and goods environment. In all instances, we are dealing with ensuring that imported and exported goods are subject to appropriate compliance techniques and optimal use of resources to deal with the risks we have identified. In this topic we will look at various options to achieve this goal. A number of methods for assessing compliance are identified and the use of audits, one of those methods, is considered in more detail. However, a customs audit may not always be the best or the most appropriate response to a particular risk. Audit activity – particularly systems-based approaches, or transaction-based auditing of large sample sizes – can be time-consuming and costly exercises and may prove to be inefficient in many cases. In the following section we look at risk treatment options which might make audit activity unnecessary or better-targeted.

Leverage Exercise

As the term suggests, the use of leveraging is to maximise the impact of a compliance activity with a reduced effort. This can be possible in several ways in the management of compliance with findings of non-compliance for one trader being converted to targeting a larger cohort of traders dealing in similar goods, or a single piece of research and analytical work highlighting a risk of non-compliance across a cohort of traders, or elements of both.

The detection of non-compliance by a trader during field or desk-based audit activity, or through pre- clearance intervention may indicate a larger compliance issue within an industry sector. Appearances of misunderstanding or misuse as it relates to finding of a classification, valuation, origin, TCO, etc. issue, when subject to further analysis, can identify the same misunderstanding or misuse among other traders. In some respect, the knowledge learnt in a single audit activity may lead to indicators of a larger scale non-compliance problem and the audit teams have already developed the knowledge of what documents to request and what testing to conduct when approaching other traders.

In this type of situation, the confirmation of non-compliance with one particular trader and using the same risk analysis already undertaken to target that trader, the compliance team can quickly identify similar traders exhibiting the same risk indicators. The compliance team can then respond to this larger target group of traders as appropriate such as: requesting documents for a desk audit, profiling consignments for pre-clearance intervention, or a field audit using monitoring powers.

The concept of ‘leveraging’ can also be applied in a less intrusive, but no less effective manner. The emergence of risk of an area of non-compliance can be communicated to a large group in either:

  • a formal template style letter to a trader that falls into this area of emerging non-compliance risk, outlining the nature of that risk and how the trader can take the opportunity to self-review and make adjustments as necessary; or
  • a formal template style letter sent to all known service providers, in particular licensed brokers and consulting firms who may be advising, compiling and lodging declarations on behalf of traders, outlining the emerging risk and seeking assistance in communicating to their clients the need to ensure they are in compliance and to review earlier transactions; or
  • the use of more general announcements of forward compliance planning. Customs can communicate with the trading community its concerns in relation to current and emerging compliance risks. These can also be communicated directly to

One advantage of ‘leveraging’ is the potential for voluntary disclosure and/or future improved compliance through the simple issuing of a letter indicating that:

  • you know of the risks;
  • you know the likely traders or the industry sector most likely not to be in compliance;
  • you will be using compliance activities, including auditing, to assess levels of compliance by

individuals; and

  • the relevant penalties and sanctions that would apply should that compliance activity confirm non-

compliance (in the context that the trader was warned that they could be subject to compliance activity for that potential non-compliance).

Returns for this type of leverage exercise may also be realised with little field work and perhaps more a focus on monitoring and analysis from the office. The Australian Taxation Office recently conducted a nation-wide leverage exercise on taxpayers claiming home office expenses as tax deductions: the leverage exercise started with 8 million taxpayers in 2016/17 claiming some $21.98 billion in work

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Customs Brokers, Forwarders and

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other service providers. This puts all parties on notice as to areas that you will be targeting, and

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provide them with the opportunity to review their self-assessment processes and outcomes to

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make sure they are not in breach of the law.

related expenses and after 12 months that figure had reduced to 7 million taxpayers claiming $16.50 billion in 2017/18.

The leverage approach then needs to monitor the response by traders. In order to conduct such monitoring, there needs to be a process to identify:

  • Amended import and export declarations lodged with additional duties being voluntarily disclosed in relevant cases;
  • Downward trend in use of incorrect classifications, false values, etc. as traders heed the warning;
  • Increased use of Tariff Advices and other advance ruling systems; and
  • Any combination of the above.

The identification of traders or industry sectors, in which monitoring confirms no such change in behaviour, also provides you with a smaller and more focussed target group to which you can then apply desk or field audit type compliance options.

Audits

A common form of compliance assessment in any regulatory environment is through the use of post- transaction audits. Indeed, the commentaries on risk-based compliance management tend to single out post-transaction audit as the main compliance assessment tool. But it is not quite so simple. For a start, there are a number of different audit approaches available to regulators, including:

  • desk audits;
  • transaction-based audits;
  • system-based audits; and
  • prudential audits.

The nature of the potential risk identified by the regulator when selecting a company for audit will generally dictate the approach adopted. In all cases, however, the level and type of intervention should be based on the level of identified risk. It is important to note that the results of these regulatory interventions should be used to build up a picture of the level of compliance for each trader, industry sector etc. In other words the results should be an input into the risk assessment part of the risk management process.

Document retention and production

For post-transaction audit to work your domestic legislation must require traders and service providers to retain commercial documents and records relating to goods that are imported or exported for a period of years. (In Australia, under s.240 of the Customs Act, this period is 5 years.) The legislation also should require that the documents and or records should be available to be produced when called upon. This head of power is required to underpin post clearance assessments / audits and the like.

Desk audits

Desk audits are generally used to examine an unusual transaction, which may fall 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 them to provide additional information to support the data declared in the transaction. For example, Customs may call for all commercial documentation to support a declared value, such as invoices, contracts and trade catalogues. A satisfactory response will generally return the company concerned to a lower rating of risk, while an unsatisfactory explanation may elevate the risk status and result in a new approach, which is likely to involve some form of field audit work. To be successful, desk audits require a system where relevant transactions are regularly monitored, and anomalies quickly identified.

As an example of a simple desk audit, the Australian Customs Service used to collect excise as a customs duty on imported petroleum. The ACS knew with a high degree of certainty how much excise would normally be paid weekly by each of the major petroleum importers in Australia. Should there be an unexplained shortfall in a weekly payment, the ACS could immediately ask the company concerned for an explanation and documentary evidence supporting the explanation. Often the explanation would be a simple one – such as the unexpected non-arrival of a scheduled tanker-load of fuel. Anomalies such as these were easy to detect and easy to verify – while guaranteeing the integrity of the revenue.

Transaction-based audits

Transaction-based auditing involves testing transactions that have been identified as a potential risk. This audit approach is often suitable for use in relation to small companies, where a large proportion of the company’s transactions are considered to be high-risk. The approach may also be effective for medium to large companies in situations where a focussed risk area has been identified.

The transaction-based audit approach involves the verification of any information provided by the company, by referral to all available related documentation. For example in the customs import context, to ensure that the relevant fields on the import declaration had been accurately reported to customs, auditors might compare import declarations against documentation such as company purchase orders, buying or selling contracts, suppliers’ invoices, bills of lading, air waybills, bank statements, or guarantees. The identification of one or more errors during a transaction-based audit may indicate systemic problems in the preparation and supply of information to the regulatory authority. The auditor may need to consider a systems-based audit approach, especially for larger entities, to review the systems and controls which produce the information. The auditor may also need to determine whether other companies may be making the same or similar errors.

Systems-based audits

The systems-based audit approach is a step up from transaction testing. It is used to gauge compliance levels by seeking assurance over the systems which create those transactions. The systems-based audit approach involves understanding the business systems and, importantly, testing the internal controls in those systems which have been developed to ensure compliance. A systems-based audit may be an efficient way to gauge the compliance levels of a large business that has a large and often complex number of transactions. This type of approach does not, however, lend itself to smaller businesses, or businesses where auditors can have little or no confidence in the internal controls, for example, a family owned and managed company or a company whose transactions are essentially in cash.

Prudential Audit

A further audit method is to encourage traders to conduct their own audits, using qualified or accredited third parties. In this situation, Customs may express its preparedness to accept an audit provided by a company where that audit has been carried out by a company recognised as qualified by Customs. This may be the same auditors that do a company’s financial audits on a regular basis, or it may be a different company which specialises in customs-compliant performance audit. As long as Customs is prepared to accept the results of this independent audit then they can deliver the same compliance benefits as if they had conducted the audit themselves. Regardless of whether Customs accepts the results of such audits, they are often able to use the audits as a useful starting point for their own independent enquiries.

Compliance Enforcement

There are of course a number of people who are deliberately non-compliant, whether for personal or financial advantage or because they consider that being compliant requires too much effort. What Customs requires therefore is a dual approach to compliance management, or indeed a continuum of approaches, involving a ‘regulatory enforcement’ approach at one end of the spectrum and a ‘regulatory assistance’ approach at the other. Regulatory enforcement includes such interventions as sanctions, prosecution, licence revocation, and the like, while regulatory assistance includes client services such as those mentioned above.

This brings us to the final tier of the pyramid, that dealing with the imposition of sanctions. Inevitably instances of non-compliance with regulatory requirements will occur. Some of these infractions may be deliberate criminal acts taken by individuals or businesses set on gaining some advantage from their action. Others may be unintentional and might be committed by businesses or individuals who generally try (but fail) to be compliant.

When determining what response is appropriate, Customs needs to consider the circumstances relating to the breach. These considerations might include the situation that led to the breach, what steps had been taken before and subsequent to the breach to minimize the risk of the breach occurring or recurring and the seriousness of the infraction. Customs’ response to noncompliance can range from education and training, increased intervention, both prior to and after clearance through to sanctions.

Sanctions

Appropriate sanctions are necessary for establishing a credible threat to compel compliance. Administrations choose from numerous kinds of penalties – requiring securities, suspension of licenses, administrative penalties, fines and even imprisonment. Note also that sanctions may involve the removal of a previously granted benefit – such as removal of a traders’ accredited client status (see Topic 6).

Before determining the need for or nature of a sanction, however, it is important to identify the true nature of the risk by establishing why the error has occurred. For example, 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 type of mitigation strategy that should be employed to ensure future compliance will depend on the nature of the identified risk. Unless the error is found to be intentional, it may be appropriate to address systemic problems within the company, or to provide the company (or perhaps an entire industry sector) with advice on compliance issues, or provide formal clarification of the law through binding rulings or other means.

In this regard, it is important to recognise that different solutions will be required to address ‘honest mistakes’ on the one hand, and deliberate cases of non-compliance on the other. For example, 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 individuals (or organisations for that matter), a rigorous enforcement approach is likely to be required.

Sanctions and International Law

No two legal systems are the same and no two countries penalise offences in the same way, but there are some threads common to all systems which are recognised in Specific Annex H of the Revised Kyoto Convention. In essence, there are two quite different types of offences, which, for the sake of convenience, we shall refer to as criminal offences and administrative offences.

Criminal offences are matters involving a breach of the criminal law, committed with intention or recklessness as to the consequences, and usually punishable by a severe penalty (either imprisonment or a large fine). Offences established, for example under the 1988 UN Illicit Trafficking Convention, are expressly to be penalised with a severe penalty. It is left to the legislators to determine how severe. There are many other offences which may result in severe punishment of offenders. Smuggling has long been punishable by imprisonment or by a heavy fine. Fraud is another, particularly if the amounts of money concerned are significant. Fauna smuggling, arms trafficking, even intellectual property offences under TRIPS may lead to criminal charges and penalties.

Normally, these charges will be brought before a court of law and the offender will be dealt with through the criminal justice system. The case may be prosecuted by the Customs or by the Government’s appointed prosecutor, with Customs in the role of witness rather than prosecutor. The offender will be entitled to all the rights that go with being tried through the criminal justice system, including the right to be represented by counsel and the right to appeal to the appropriate court of review.

By way of contrast, there are many customs offences which are either minor or such that a smaller penalty is warranted. Rather than proceed to bring charges before a court of law, Customs authorities may themselves be empowered to impose a penalty. Where Customs acts in this way, we refer to these as administrative offences.

Offences under Customs Law are more likely to be administrative offences than criminal offences. They can be dealt with more simply and the sanction imposed will normally be a monetary penalty,

often related to the value of the duty short paid. In many jurisdictions, administrative offences are usually easier to prove as the penalty is incurred for an error under the customs law, regardless of the intention of the offender. Thus, it may not be necessary to prove the state of mind of the offender, merely that they have committed the offence. Thus, if goods are undervalued by a broker, the penalty will be applied regardless of whether the broker intended to undervalue the goods or not. It is essential that all administrative penalties are clearly set out in the relevant law: the elements of the offence must be clearly defined, as well as the penalty that applies.

There are some principles relating to the investigation, prosecution and appeal of customs cases that are set down in the RKC as standards to which all countries should aspire. In many cases, these reflect domestic law principles that are already applied in most if not all jurisdictions. The bottom line is that it will be a matter for national jurisdiction to determine how these matters are to be dealt with. This is borne out in the introduction to Specific Annex H, which recognises that the Annex does not specify the procedures to be followed or the various measures that Customs can take to collect fines or execute judgments or sentences handed down by the courts or tribunals.

RKC: General provisions

The General Annex sets out a fundamental principle which is to apply to the administration of justice by customs administrations. Indeed, even before the Kyoto Convention, GATT stipulated in Article VIII that “no Contracting Party shall impose substantial penalties for minor breaches of Customs regulations or procedural requirements. In particular, no penalty in respect of any omission or mistake in Customs documentation which is easily rectifiable and obviously made without fraudulent intent or gross negligence shall be greater than that necessary to serve merely as a warning”.

This in effect describes a principle of proportionality – requiring that the penalty for an administrative offence be proportionate to the nature of the offence. This principle is picked up in Chapter 3 of the General Annex to the Kyoto Convention, which echoes some of the GATT language:

The Customs shall not impose substantial penalties for errors where they are satisfied that such errors are inadvertent and that there has been no fraudulent intent or gross negligence. Where they consider it necessary to discourage a repetition of such errors, a penalty may be imposed but shall be no greater than is necessary for this purpose.

See also Article 6 of the Trade Facilitation Agreement on this point.

This principle underpins many domestic administrative penalty procedures. Where a shortfall of duty occurs as a result of the error, the penalty will often be expressed as a percentage of the duty payable. In other instances where the error may have no financial implications but is nevertheless an error which needs to be sanctioned, the penalty will normally be expressed as a pecuniary penalty. In many jurisdictions, too, it may require a series of errors before the penalty is imposed. It remains at all times, however, for the domestic legal system to determine the appropriate penalty.

RKC: Specific Annex H

In addition to the principle of proportionality, Annex H also recognises that there needs to be a time limit on prosecutions, a period beyond which proceedings may no longer be taken. Standard 4 of Annex H leaves it up to each national jurisdiction to determine what that time limit should be. In many

jurisdictions, the time limit will equate to the period for which traders are required to keep a documentary record of their transactions. Similarly, Standard 3 specifies that it is up to national legislation to determine which persons can be held responsible for a customs offence. (Note that in many jurisdictions the importer will be liable, even if the offence has been committed by a broker or freight forwarder acting on behalf of the importer.) Legal persons (such as companies) as well as natural persons can usually be held liable.

Administrative Settlement of Customs Offences

The phrase ‘administrative settlement’ is used in the guidelines to Annex H to refer to a decision by customs to impose a penalty, and thereby to avoid ‘costly and lengthy court proceedings’. It is seen as a facilitative measure – although traders may see it more as a hindrance to trade! It is important to note that in all jurisdictions, if there is dissatisfaction with the administrative authority, there should always be an opportunity for the aggrieved party to go the judicial authority to seek redress.

In line with this theme of facilitation, RP 20 suggests that the customs office which discovers a minor offence should be empowered to resolve it. In some jurisdictions, this RP is unlikely to be followed, as the authority to settle matters administratively is reserved to the central authority to ensure consistency and integrity of approach. RP 21 applies this principle specifically to the case of international travellers. This in effect provides scope for ‘on-the-spot’ fines to be given to passengers, whose anticipated short presence in the country or normally relatively minor infringement would not warrant a lengthier administrative process.

Standard 22 requires that national legislation should lay down the penalties applicable to each category of customs offence that can be dealt with by administrative settlement and shall designate the Customs offices competent to apply them. This is clearly intended to ensure a high level of transparency in the penalties which will apply.

Standard 23 again applies the principle of proportionality to the administrative settlement of Customs offences. In this instance, though, in addition to the test of the seriousness of the offence, the standard also recognises that the previous record of the offender should be taken into account. This latter element means that the penalty imposed may increase – but still be proportionate – if the party concerned is an habitual offender and has not changed their practices in light of earlier penalties or warnings. The main principle remains, however – that persons should not receive severe penalties for relatively minor offences.

Standard 24 attempts to deal with the issue of the declarant who has taken all reasonable care when completing a goods declaration but commits an offence nevertheless. In these circumstances, which may arise because of incorrect information transmitted from the country of origin of the goods, the Customs is expected to take into account the fact that the declarant has taken all reasonable steps to ensure the accuracy of the information. In countries where a self-assessment system operates, there is an expectation that declarants will take all reasonable care to ensure the accuracy of information provided. The onus is on the declarant, and Customs will normally expect the declarant to verify the accuracy of information before submitting it in a declaration.

Reviews and Appeals

Whether offences are criminal or administrative, it is important that there be a process of review of decisions to impose a penalty. (This is clearly articulated in the WTO Agreement on Trade Facilitation.) In some countries, special customs courts are established to review administrative penalties or to hear offences under the Customs Law. This provides a closed system of administration in which the specialised courts are responsible for the proper administration of penalties and offences and appeals under the law. It is normal, however, for there to be a right of appeal from these tribunals to the highest court of the land, or to a final court of appeal outside the closed system. In other systems, customs matters will be heard by the same tribunals that review administrative decisions taken by other ministries or ministers.

Rights of Appeal

For those who are prosecuted under it, the criminal justice system will provide rights of appeal for customs offences. For those who are subject to administrative process, Standard 27 provides that they shall have the right of appeal to an authority independent of Customs, unless the offender has chosen to accept a compromise settlement. This standard essentially says that Customs should not be the final arbiter of whether or not a customs offence has been committed.

In those countries where a specific Customs court exists, the administrative penalty imposed by customs may be reviewed first by that court. Both parties – Customs and the offender – may then bring the matter before a higher court. This higher court is likely to be a court within the national system rather than another customs court. For those jurisdictions where no specific customs court exists, the court of appeal is likely to be either a tribunal established to review administrative decisions, or a higher court with appropriate jurisdiction. In some particularly serious cases, the matter may even progress to the highest court of the land, if the issue contains a substantive matter of law rather than fact to be resolved.

Compliance in the Australian Border Force

The compliance process used in Australia by the Australian Border Force provides a useful case study to see how administrative penalties are arrived at. Comprehensive information on the ABF’s compliance program is available at: Trade and Goods Compliance.

The Infringement Notice Scheme

The Customs Act (1901) in Section 243X establishes the Infringement Notice Scheme. The Scheme allows Customs to impose a penalty on an importer or broker (or both) as a penalty for a breach of the Act (as set out in Divisions 1-4 of Part XIII of the Customs Act). The penalty is limited to an amount no greater than one quarter of the amount that a court could impose for the same offence. Should the party penalised refuse to pay the penalty, then Customs has the right to bring that party before a Magistrate to have the Magistrate rule on whether a penalty should be applied and if so in what amount.

A number of restrictions have been developed over the years to ensure that the Scheme is not administered without proper reference to the factors set out in Specific Annex H (although Australia

has not formally accepted Annex H). These factors are set out in the Infringement Notice Guide, the latest edition of which is dated August 2018 and is available on the Border Force web site. It states:

In determining whether an infringement notice is an appropriate enforcement response, the ABF takes into account a broad range of factors. Circumstances where the ABF is more likely to give an infringement notice rather than prosecute for an offence may include:

  • where the alleged offence is isolated or non-systematic;
  • where remedial or risk mitigation action was taken following the ABF bringing the issues of concern

to the person’s attention (for example, through a formal warning);

  • where the facts that led to the alleged offence are straight forward and are not in dispute;
  • where the alleged offence does not pose a significant risk to the border or the collection of

revenue; and

  • where the ABF considers the infringement notice is necessary to form part of a broader industry or

sector compliance and enforcement program.

Circumstances where prosecution is more likely to be an appropriate enforcement response may include:

  • where the ABF has previously taken action against the person for similar breaches of the law;
  • where the alleged offence is more serious in nature and the consequences to the community could

be severe;

  • where the alleged offender has a substantial record of non-compliance and recidivism, for which

an infringement notice would not be an effective deterrent; and

  • where the person has, as a consequence of alleged offences, obtained a financial or other

advantage, to the detriment of others.

Attachment A to the Guide gives a comprehensive diagram of all the offences under the Act which are subject to penalty, and what the penalty is for each offence. This is a good example of a transparent compliance program which should be known to all those dealing with Border Force at a commercial level.

Summary

Customs administrations are powerful authorities with the potential to have a significant impact on the commercial operations of companies and the personal liberties of individuals. It is especially important that the law is administered transparently and impartially. The power to impose a penalty must be exercised carefully and after due and proper consideration of all the facts. The person charged with an offence must be given an opportunity to put forward arguments in their defence. The power to make administrative decisions gives the customs a quasi-judicial authority. It is imperative, therefore, that there are checks and balances on the exercise of that power. The penalties that can be imposed must be proportionate, and those who are subject to such measures must be granted the right of independent review.

Resources Available on Moodle

Revised Kyoto Convention


Article 2


CUSTOMS AND BORDER CONTROL

RISK AND COMPLIANCE MANAGEMENT TRAINING PROGRAM

TOPIC SIX:
Risk-based Recognition of Compliance

Study Guide July 2020

© Prepared on behalf of the Customs and Border Protection Service by the Centre for Customs & Excise Studies, Canberra, ACT 2601 Australia.

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Contents

Topic 6: Risk-based Recognition of Compliance ………………………………………………………4         Early Recognition and Reward Schemes…………………………………………………………………4 Authorised Economic Operators (SAFE) …………………………………………………………………5 Trade Facilitation Agreement ……………………………………………………………………………….6 Authorised Economic Operator Schemes today……………………………………………………….7 Australian Trusted Trader …………………………………………………………………………………….8 Summary ……………………………………………………………………………………………………………8 Resources Available on Moodle……………………………………………………………………………..8 WCO Safe Framework of Standards 2018;……………………………………………………………….8 Australian Trusted Trader Agreement Template. ……………………………………………………..8

Topic 6: Risk-based Recognition of Compliance

Our final topic looks at the concept of Reward and Recognition, the right hand element of our triangle on top of the Compliance Pyramid. We are giving this a topic heading in its own right because it is becoming a widely recognised and accepted integral part of a contemporary compliance strategy. It is a logical extension of the fundamental change in thinking encapsulated in the Revised Kyoto Convention – that Customs should cooperate with the trade. The traditional confrontational approach has been replaced by one of cooperation and collaboration. As an outcome of the trade’s willingness to cooperate, the trade should be recognised and rewarded for keeping its side of the bargain.

“Recognition and reward” is a term used to describe those compliance management strategies that regulators may employ in situations where certain members of the regulated community are deemed to be relatively trustworthy, that is, present a relatively low risk of non-compliance and, to maintain that status, are given a measure of “reward” as an incentive to remain highly compliant.

Employing a program of recognition implies that an active decision to ‘reward’ compliers has been taken on the part of a regulatory authority. It is quite different to the passive response of simply paying less attention to compliant companies, although some of the potential benefits represent a reduced level of regulatory intervention. Indeed, under a recognition program, low-risk companies are permitted to operate under less onerous regulatory requirements and may anticipate little in the way of regulatory intervention, thereby receiving relatively high levels of facilitation.

Other benefits for compliant companies under a recognition program may include such things as the ability to self-assess their liabilities and entitlements, less onerous reporting requirements, periodic payment arrangements, and simplified procedures. In some regimes, Client Managers will be appointed for each rewarded company, making their dealings with Customs simpler and quicker. While the concept of self-assessment may imply a regulatory ‘free rein’, it is important to note that, under such an arrangement, the parties are permitted to undertake their own assessment of their compliance with the relevant regulations, on the understanding that such assessment may be subjected to some form of government verification.

Early Recognition and Reward Schemes

One of the earlier Customs recognition programs was ‘The Stairway®’, developed by Swedish Customs and introduced in 2002. This system allowed operators (importers, exporters and forwarding agents) to seek accreditation at various levels. The higher the level (the highest being 5), the more conditions the applicant had to meet. In return, the higher the level of certification, the more benefits the operator received. What this meant was that by offering certain levels of facilitation at each of the steps of The Stairway®, such as simplified procedures, deferred payment of duty, minimal or no interruption to the flow of cargo by Customs, Swedish Customs provided a reward to highly compliant operators and an incentive to other operators to improve their level of compliance so that they too could achieve accreditation and reap the benefits of the program. It provided a strong incentive for traders to invest in IT and improved physical security as there would be a financial benefit in being on the higher levels of the Staircase.

The concept had its genesis in part in Transitional Standard 3.32 of the Revised Kyoto Convention which provides for the development of special procedures for ‘authorised’ traders. It reads as follows:

For authorized persons who meet criteria specified by the Customs, including having an appropriate record of compliance with Customs requirements and a satisfactory system for managing their commercial records, the Customs shall provide for:

  • release of the goods on the provision of the minimum information necessary to identify the goods and permit the subsequent completion of the final Goods declaration;
  • clearance of the goods at the declarant’s premises or another place authorized by the Customs; and, in addition, to the extent possible, other special procedures such as:

o allowing a single Goods declaration for all imports or exports in a given period where goods are imported or exported frequently by the same person;

o use of the authorized persons’ commercial records to self-assess their duty and tax liability and, where appropriate, to ensure compliance with other Customs requirements; and

o allowing the lodgement of the Goods declaration by means of an entry in the records of the authorized person to be supported subsequently by a supplementary Goods declaration.

This effectively began what are referred to in the WTO Trade Facilitation Agreement as ‘Authorised Economic Operator’ (AEO) schemes such as the Australian Trusted Trader (ATT) programme. Such programmes require the trader to

Authorised Economic Operators (SAFE)

The AEO concept was substantially advanced (and more widely adopted) following the adoption of the WCO SAFE Framework of Standards to Secure and Facilitate Global Trade (SAFE Framework) in 2005. The Customs-to-Business (C2B) pillar of SAFE is largely based on the Revised Kyoto Convention principle of partnership between Customs and the private sector. This pillar focuses on the identification of international companies which offer a high degree of security guarantees. The standards allow for the companies to voluntarily demonstrate their compliance with strict Customs security criteria and to be recognised as ‘Authorised Economic Operators’. The expectations of the private sector are summarized in this paragraph from the introduction to Pillar 2:

This SAFE Framework sets forth the criteria by which businesses in the supply chain can obtain authorized status as a security partner. Such criteria address issues such as threat assessment, a security plan adapted to the assessed threats, a communication plan, and procedural measures to prevent irregular or undocumented goods entering the international supply chain, physical security of buildings and premises used as loading or warehousing sites, security of cargo, means of transport, personnel vetting, and protection of information systems.

It is worth pointing out too that the introduction draws a distinction between AEOs and those authorised persons referred to in Standard 3.32 of Chapter 6 of the General Annex to the RKC (and, as we shall see shortly Paragraph 7 of Article 7 of the Trade Facilitation Agreement). The distinction is that AEOs are recognised as contributing to the security of the supply chain while authorised persons are rewarded for compliance with reporting, revenue and other trade-related requirements. SAFE is recognised as an all-encompassing scheme: AEOs will enjoy the facilitation privileges associated with Standard 3.32 and Article 7(7) but not all companies enjoying those privileges will be recognised as AEOs.

Trade Facilitation Agreement

The concept of the authorised trader under TS 3.32 was developed further in 2013 with the adoption of Article 7 of the WTO’s Trade Facilitation Agreement. Article 7 covers the ‘release and clearance of goods’ and similar to the Revised Kyoto Convention calls on signatories to implement risk management as the basis for application of customs controls at the border such as the identification, stopping and examination of goods. Article 7, paragraph 7 refers specifically to Authorised Economic Operators. It is worth setting down the terms of Article 7, para 7 so that you can see how much it has added to TS 3.32, and how it differs in emphasis from the AEO concept in SAFE:

7 Trade Facilitation Measures for Authorized Operators

7.1 Each Member shall provide additional trade facilitation measures related to import, export, or transit formalities and procedures, pursuant to paragraph 7.3, to operators who meet specified criteria, hereinafter called authorized operators. Alternatively, a Member may offer such trade facilitation measures through customs procedures generally available to all operators and is not required to establish a separate scheme.

7.2 The specified criteria to qualify as an authorized operator shall be related to compliance, or the risk of non-compliance, with requirements specified in a Member’s laws, regulations or procedures.

(a) Such criteria, which shall be published, may include:

(i) an appropriate record of compliance with customs and other related laws and regulations;

(ii) a system of managing records to allow for necessary internal controls;

(iii) financial solvency, including, where appropriate, provision of a sufficient security or guarantee; and

(iv) supply chain security. (b) Such criteria shall not:

(i) be designed or applied so as to afford or create arbitrary or unjustifiable discrimination between operators where the same conditions prevail; and

(ii) to the extent possible, restrict the participation of small and medium-sized enterprises.

7.3 The trade facilitation measures provided pursuant to paragraph 7.1 shall include at least three of the following measures:

(a) low documentary and data requirements, as appropriate;
(b) low rate of physical inspections and examinations, as appropriate; (c) rapid release time, as appropriate;

(d) deferred payment of duties, taxes, fees, and charges;

(e) use of comprehensive guarantees or reduced guarantees;

(f) a single customs declaration for all imports or exports in a given period; and

(g) clearance of goods at the premises of the authorized operator or another place authorized by customs.

7.4 Members are encouraged to develop authorized operator schemes on the basis of international standards, where such standards exist, except when such standards would be an inappropriate or ineffective means for the fulfilment of the legitimate objectives pursued.

7.5 In order to enhance the trade facilitation measures provided to operators, Members shall afford to other Members the possibility of negotiating mutual recognition of authorized operator schemes.

Article 7 of the Trade Facilitation Agreement can be found at the following link: TFA Article 7 – Release and Clearance of Goods.

Authorised Economic Operator Schemes today

The concept of an AEO has provided a formal way in which Customs administrations may recognise compliant companies. It has extended beyond importers and exporters to include any company involved in the supply chain: the AEO is defined in SAFE as

‘a party involved in the international movement of goods in whatever function that has been approved by or on behalf of a national Customs administration as complying with WCO or equivalent supply chain security standards. Authorized Economic Operators include inter alia manufacturers, importers, exporters, brokers, carriers, consolidators, intermediaries, ports, airports, terminal operators, integrated operators, warehouses, distributors.’ (WCO 2015, Annex 1)

Many countries have merged the requirements of SAFE and of the TFA and extend AEO status to any company which can demonstrate compliance with all requirements. While eligibility requirements may vary slightly between countries, becoming an AEO signifies that the business complies with certain security requirements and has a good history of compliance with Customs requirements and that it has systems and procedures in place which will ensure that high levels of compliance will be maintained. In recognition of this, the AEO and its cargo will be subjected to less intervention by Customs, thus avoiding delays and minimising costs.

In order for companies that do business in many countries to get full advantage of their AEO status, it is essential that the AEO status in one country can be recognized in another. Although this is a key principle of the WCO guidelines the practical aspects of each country being satisfied with the other’s standard of validation are proving more difficult. To facilitate mutual recognition the key issues of common AEO requirements and consistent risk management approaches become essential. Customs administrations need to be using uniform criteria in assessing AEO status if companies are to benefit from world-wide participation in the AEO programs. The WCO has developed a model Mutual Recognition Agreement for this purpose.

Australian Trusted Trader

An example for you to look at is the Australian Trusted Trader Scheme, which combines the SAFE AEO and the TFA AEO concepts in one. (Go to ABF Trusted Trader Program for an explanation of how the Scheme works in practice.) The scheme is the highest form of recognition that the ABF can give. The stated aim of the ATT programme is to recognise compliant companies through:

  • rapid clearance of cargo;
  • minimal inspection of imported and exported goods;
  • periodic reporting requirements;
  • periodic duty payment requirements; and
  • mutual recognition of AEO status in other countries.

Part XA of the Customs Act 1901 provides the legislative base for the program and gives the Comptroller General broad powers to enter into Trusted Trader Agreements. The Agreement is tailored for each company and modelled on the proforma at Trusted Trader Agreement Template. This includes providing an account Manager for the Trusted Trader to assist with issues arising from the Trader’s dealings with Customs, “top of pile” status for the handling of transactions, mutual recognition of the Trusted Trader’s status and access to duty deferral.

To join the Scheme, companies apply to the ABF, provide evidence of their levels of compliance, and then host a verification visit by ABF officers to test the evidence they have provided. ABF has put considerable effort in the last 12 months to broaden membership of the ATT Scheme and set itself the goal of having 1000 companies on the scheme by the end of June 2020. It has also concluded several mutual recognition agreements with the Customs administrations of some of our biggest trading partners.

Summary

The trend in compliance, as evidenced by the Authorised Economic Operator concept, is towards cooperation and collaboration, providing reassurance to Customs and Government that the major trading, broking, shipping and forwarding companies are compliant with all aspects of the Customs Law, allowing Customs to put its enforcement effort into those companies which have exhibited a failure to meet AEO standards. It has also signalled much closer cooperation between Customs Agencies in recognising and rewarding those companies which demonstrate both the capacity and the intention to meet international standards of compliance. This is a sophisticated form of compliance management, assisted by smart use of IT and other technologies, and a focus on the company rather than the transaction, leading to less fruitless real time intervention and more effective post transaction enforcement.

Resources Available on Moodle

WCO Safe Framework of Standards 2018; Australian Trusted Trader Agreement Template.

  

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