Risk Management Approach to Compliance Management

Topic: Management
Words: 1991 Pages: 8

Introduction

Customs control is one of the critical institutions of customs law. The significance of customs control is its focus on protecting the fundamental constitutional value – human rights and freedoms- and its direct connection with national security problems. Customs control is the most important activity carried out by customs authorities. The latter is integrated into a complex multi-level system of state financial control, administering tax and non-tax revenues of the state budget, currency control, and internal control of budget expenditures. Customs administration is considered as such functioning of the management system in the field of customs, with the help of which the law enforcement and fiscal functions of customs authorities are implemented, the reliability and quality of customs formalities are increased.

One of the main levers by which the state influences foreign trade is customs regulation, which solves many problems. An example is filling the revenue side of the budget, supporting domestic producers, saturating the domestic market with certain goods, creating favorable conditions for exporting domestic products, and several others.

Compared to the gatekeeper system, guided by which customs mainly performed only a throughput role, the risk management system is much more productive. This opinion is shared by Joukar, M. & Hasanpour (2019), “Customs has replaced its role as a gatekeeper by a complex modern risk management approach.” When an enormous amount of cargo passes through the borders every day, the usual gatekeeper management system cannot remain effective since it is guided by it, and it takes much more time and resources to check. In addition, this style of management is outdated as customs are now becoming more of a checkpoint for goods than just a checkpoint for people.

Risk Management Approach in Customs Administrations

According to the requirements of the Kyoto Convention, risk management is the main basic principle of modern customs control methods, allowing optimal use of customs authorities’ resources without reducing the effectiveness of customs control. It can significantly increase the throughput and promote the development of trade relations (Thibedeau, 2019). The World Customs Organization has been improving international standards, building capacity, and strengthening cooperation for a long time to ensure safe international trade and maintain order in customs administrations (Allende, 2022, p. 9). Risk-based procedures concentrate customs control on areas with the most significant risk, allowing the bulk of goods and individuals to pass through the border crossing point relatively freely. By analyzing and measuring the degree of compliance by an individual trader, commodity, or country at the national, regional, and local levels, customs authorities can determine when closer attention to the cargo in the form of physical inspection and verification of accompanying documents is essential and will provide the necessary results. By recognizing the status of an authorized trader, which involves fewer checks than other non-compliant entities, customs authorities encourage traders to invest in compliance legislation. By pre-clearing cargo and goods declarations, customs authorities have the time to carry out risk assessments while allowing the immediate release of goods as soon as they arrive. A selective risk-based approach works even more effectively in an automated environment, as computer-aided risk assessment and selective screening can be consistently applied to all import/export transactions and allows faster and more accurate analysis of incoming data, for example, from cargo declarations, taking into account operating risk parameters. Information technology can also make updating all existing risk parameters much more accessible, considering the latest results of customs clearances and inspections. The absence of an appropriate computerized risk assessment and management system should not justify the refusal of customs authorities to apply this fundamental principle of trade facilitation.

Risk management is the analysis of a risk situation and the development and justification of a management decision, often in the form of legal action to minimize the risk. It involves a certain amount of knowledge and a set of procedures and technologies to minimize risks in various areas of activity – economic, scientific and technical, military, and others, including customs activities. Risk management activities include the following main stages: identification of risk, analysis of risk, choice of method and measures of risk management, risk prevention, and its control, risk financing, and evaluation of its results.

Recently, the complications associated with the increase in the volume of international trade have significantly changed world trade practices. Therefore, these changes “have significantly affected the way Customs administrations carry out their responsibilities and organize their business operations” (Mikuriya, n.d. p. 8). The most challenging task of public services can be the application of a systematic approach to regulating the supply chains of goods, facilitating trade, and developing foreign trade services. Developing the risk management system in the direction of supply chain control provides the most accurate understanding of cost-effectiveness in terms of risk in supply chains. This area is subject to various types of risk. With the constant growth of trade and the threats associated with terrorist acts, the development of various kinds of crime requires high-quality and effective interaction between government services as well as representatives of the business community. Today, the priority direction is the measurement of possible threats, the formation of common markets for the sale of products, and unions, and all these factors contribute to the emergence of common risks. To modern customs, effective risk management is a central procedure, balancing trade facilitation and regulatory oversight. The risk management systems of the national customs administrations are based on international regulations and are implemented, taking into account the national conditions for implementing foreign economic activity. At the tactical level of risk management, the customs authorities develop risk management measures based on the analysis and assessment of risks and according to the risk register. At the operational level of risk management, the customs authorities apply these tools to control goods and vehicles moving across the customs border.

Example of a Risk Management Implementation

As an example of the transition to a risk-managed style of compliance management, one can name countries of Central America, such as Panama. In 2021, the World Customs Organization, together with the International Monetary Fund (IMF), the Institute of Fiscal Studies of Spain (IEF), and the National Distance Education University (UNED) announced a program for such a transition. Thanks to the developed comprehensive program, the needs of various countries of Central America in the field of customs and tax administration will be satisfied. This project provided customs personnel with the necessary knowledge to successfully transition to a risk-managed style of compliance management. Thanks to the new management system, it will be much easier to perform managerial functions and achieve their goals. An important element in the development of customs administrations is strengthening managerial functions. The course has helped senior Panama officials improve their skills in managing customs and tax administration. Particular attention was paid to keeping under control uncertain situations that could escalate into armed clashes.

New Approach to Compliance Management against the Integrated Compliance Management Framework

The Integrated Compliance Management Framework in customs can be defined as an ordered set of stably interconnected customs system elements that ensure customs authorities’ functioning and development. The fundamental goal in building the management structure is a clear differentiation of tasks and functions between different management units while respecting the basic management processes in the customs system. This goal is achieved by organizing customs management structures by the descriptive-cognitive matrix of customs. A compliance management framework is a single system that includes the main elements of risk management. Consequently, the customs authorities receive a logical methodology for managing and complying with customs regulations.

Compliance control is a risk management process aimed at voluntary compliance with state legislation, as well as ethical standards adopted in the field of regulated legal relations and business practices, to maintain proper rules and standards of conduct in the market, as well as strengthen the organization’s image. The Compliance Management Framework includes many points related to effective risk management and avoidance strategy: the law being implemented, cases of application of the law, methods for assessing compliance with the law, risk assessment, and methods for reducing the resulting risks. This system is developed based on legislation and its compliance, as well as related processes, “which represent the regulatory requirements for which Customs has administrative responsibility” (Widdowson, 2020, p.66). This refers to all components of regulatory obligations, such as the transit of goods across the border and their export and import.

All members of the trading community should be aware of their obligations and rights to avoid conflicts in the future. It is imperative to verify compliance using data validation, documentation validation, audit, investigation, and inspection in methods that case. If during such a check any inaccuracies are revealed, the cause of the discrepancies should be established. This is done through risk assessment to find the best solutions to mitigate such risks. Wilcox-Daugherty (2018, p.1) stated, “Risk management serves as the foundation for various trade facilitation activities at national borders, including post-clearance audit and authorized operator programs.” Effective risk management is a reflection of social and economic progress. Effective risk management does more than help prevents disasters and ensure safety. With good risk management, managers are prepared to take on risks that they would not be able to take on otherwise. These risks ultimately are the key to the successful functioning of customs services. For example, in the early days of the Internet, many companies seized the moment by taking the appropriate risk, eventually outperforming their less determined competitors. In this context, risk management does not mean creating a risk-free world. Everyone has the right to take on at least some risks to benefit if the event associated with the risk does not occur or to suffer losses if it does occur. Risk management is carried out to avoid unnecessary, unforeseen, or preventable losses. This system is “the international standard for making Customs regulatory procedures as efficient and effective as possible” (Following Jamaica’s accession, the Revised Kyoto Convention now has 128 contracting parties, 2021). The risk management system offers tools for building a structured vision of the future and solutions associated with uncertainty issues.

The implementation of risk management in an organization or regulator provides its management with the opportunity to make rational decisions based on the information available, no matter how complete it is. To prove the validity of the implementation of the risk management system, one should refer to the fundamental principle of project management, which characterizes the interdependence of the following parameters: project budget, quality of the final product, and time for its implementation. Risk management tools help to make rational choices from a range of alternatives in a given triangle. In other words, the level of achievement of the desired goal of regulation will depend on the cost of preventive measures and the rejection of the expected benefit from one or more areas of economic activity. For example, a regulator could reduce food poisoning casualties to the desired level by setting very low limits for potentially harmful substances in food. However, this would entail a significant increase in marketing and safety costs and a reduction in the forecasted profits of the food industry.

Conclusion

It should be emphasized that the stage of complex development of risk management in the customs service provides for the transition from fragmented, exclusively during customs clearance and risk management to integrated, comprehensive risk management, which should cover all areas of activity and all levels of management of the customs service.

Hazard – a potential threat of damage or other forms of risk realization due to the specifics of the object, the characteristics of the risk situation, and the nature of the specified damage. Risk exposure is a characteristic of a situation that is fraught with the occurrence of damage or another form of realization of the risk. Vulnerability expresses the degree or intensity with which damage of various sizes can occur concerning the object under consideration, the corresponding danger can be realized. Interaction with other risks has a significant impact on a single risk.

References

Allende, J. H. H. (2022). The World Customs Organization: past, present and future law for professionals. Springer Nature.

Following Jamaica’s accession, the Revised Kyoto Convention now has 128 contracting parties. (2021). World Customs Organization. Web.

Joukar, M. & Hasanpour, E. (2019). Evaluation of factors related to reducing commodity control risk in the customs (Case Study: Shahid Rajaee Customs). Religación: Revista de Ciencias Sociales y Humanidades, 4(21), 152-161.

Mikuriya, K. (n.d.). WCO customs risk management compendium. Web.

Thibedeau, C. (2019). Perspective on risk management systems for Customs administrations. WCO news. Web.

Widdowson, D. (2020). Managing customs risk and compliance: an integrated approach. World Customs Journal, 14(2), 63-79.

Wilcox-Daugherty, L. (2018). Customs modernization handbook: applying risk management in the cargo processing environment. USAID.

World Customs Organization. (2021) Launching the 2021 edition of the advanced course on tax and customs administration management. Web.