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Assignment of Customs Regulatory Compliance Management .pdf

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Customs - Regulatory Compliance Managements

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Table of Contents
Introduction................................................................................................................................. 4
New and effective approach to regulatory compliance management ............................................... 5
Application of approach to resolve problem faced by Belmontia ..................................................... 9
International Standards of Compliance Management ................................................................... 15
Conclusion ................................................................................................................................. 20
References ................................................................................................................................. 22

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The role of custom is to implement the wide range of border management policies on
behalf of government agencies.
from country to country.

The role and responsibility of customs administration vary

The responsibilities of custom are revenue collection, trade

compliance and facilitation, interdiction of prohibited substances, cultural heritage protection
and enforcement of intellectual property law. The international bodies such as the World
Trade Organisation and World Customs Organisation recognise the changing nature of border
management and response through development of global standards. For last few decades
there is high pressure from international bodies to minimise government intervention in the
commercial transaction. Moreover, the current trend is increasing expectation for customs
authorities across the world to emphasis on facilitation of trade.

Traditionally the role of

customs has been of ‘gatekeeper’ through which international trade must pass so as to protect
the interest of the nation. Hence, the role of custom has changed significantly by the advent
of technological advances, increasing globalisation of trade and revolutionary factors such as
91/11 terrorist attacks (Wulf and Sokol 2005).
The study will focus on the customs administration of developing island country of
Belmontia. The import duties and related taxes represent a significant proportion of national
revenue for Belmontia. The focus for Belmontia customs authority is revenue collection. The
report will propose the recommendation on new and effective approach to regulatory
compliance management for Belmontia customs. The given study will analyse the problems
faced by Belmontia customs and way in which the new approach will be effective in solving
the issues. The proposal also identifies and incorporates international trends and standards
relating to compliance management.

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New and effective approach to regulatory compliance management

In recent years, the international trading environment has changed considerably in
terms of speed, complexity, volume of trade, rapid technological advancement and revolution
in global trading practices. Therefore, the changes have tremendously affected the working
and responsibilities of customs authorities. As a consequence, it becomes essential for
Bemontia customs administration to adopt and implement a disciplined approach to
managing customs risk. In Belmontia, the duty and vat collected by customs department on
imported goods amount to 60 percent of the total government revenue. The country is
resource rich and has recently emerged from political instability. The county has huge
potential of economic growth (Hoekman and Ozden 2006).
Currently, the custom ensures that the correct amount of revenue is collected as per
the regulation. The department protects the trading community by prohibiting the imports of
banned items in the country. The customs department ensures that exporters and importers
have obtained necessary permits and licenses for certain goods. Although the country is
emerging as a major trading nation within its geographic region and good Customs
Regulatory Compliance Management, the country fails to achieve balance between trade
facilitation and regulatory controls (Hoekman and Ozden 2006).
Therefore, preparation of appropriate legislative framework is the essential element of
any regulatory regime. Custom and tax administration have a responsibility to comply with
the statutory provision of law. The customs administration should move away from the
traditional gatekeeper risk-averse style to a more risk-based compliance management
approach (Hoekman and Ozden 2006).

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The two common objectives of custom are trade facilitation and control. It is
important for the country to achieve a balance between trade facilitation and control. The two
risk face by country is failure to facilitate international trade and potential failure for
noncompliance with customs laws. Therefore through application of risk management
principle the country can achieve an appropriate balance between objectives. Currently, the
customs compliance management runs on a flawed assumption. It is assumed in the
administration that the only way to facilitate the process is through decreasing the level of
control ((Wulf and Sokol 2005).
As depicted in figure 1, the concept of facilitation and control are two distinct

Figure 1: Facilitation and control matrix (Source: Customs
Modernization Handbook 2005)
The top left quadrant of facilitation and control matrix represent a red tape approach.
It shows high control regulatory regime in which customs requirements are strict. In red tape
approach, the level of control is the strong factor of determining facilitation. The approach
represents a risk-averse management style. However, in modern society the red tape approach
is likely to attract criticism and complaint, as the increase in expectation of community to
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minimize customs intervention. The bottom left quadrant representing low control and low









management approach exercise little control and simultaneously achieves little facilitation.
The approach benefits are neither trading community nor the government. The bottom right
quadrant depicts the laisser-faire approach in which high facilitation and low control are
exercised. It is the appropriate approach of managing compliance in which there is no threat
and risk of government on non-compliance of customs procedures. Lastly, the top right
quadrant represents a high regulatory control and high trade facilitation. It is referred as the
balanced approach. The balanced approach maximise the benefits to both international
trading community and customs.

Hence, administration should seek to achieve a balanced

approach (Wulf and Sokol 2005).
The important role of custom is to manage compliance with the regulator that ensures
facilitation of trade. The key to achieving a balance between facilitation and control are
effective application of risk management principles. As the appropriate balance between
facilitation and control are achieved the use of risk management becomes effective. The risk
management approach focuses on the identification of potentially high risk areas and
directing resources towards such areas. The intervention is minimal in low-risk areas. The
regulatory regime adopting risk strategies break the nexus between control over goods and
revenue liability of trader. It permits customs clearance before the arrival of cargo (Wulf and
Sokol 2005).
The underlying elements of risk based compliance management strategy are compared
with tradition gatekeeper risk management style of compliance. The WCO, through the
revised provisions of Kyoto Convention, has made an attempt to achieve a universal adoption
of risk managed style.

Under gatekeeper style payment of duties and taxes is the

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prerequisites requirement of customs clearance. The elements of each style of compliance
management is grouped into four categories, i.e., the legislative framework of the country, the
administrative framework of country customs organisation, risk management framework and
the technological advancement framework. The four categories are the determining factor in
which the movement of cargo is expedite across country borders and the way customs control
is exercise on arrival of cargo. The risk base compliance management approach provides a
legislative framework that allows necessary basis in law for the achievement of the range of
administrative and risk management strategies. The risk management style of legislative
provides flexibility and customised solution that enables implementation of relevant risk
management and administrative strategies. The risk approach recognises responsibilities of
both government and trading in achieving regulatory compliance.

The risk based approach

allows administration to prepare the strategy depending upon the level of risk (Customs
Partnership: A two way street 2005).
The traditional gatekeeper style focuses on ‘one size for all’ compliance strategy. The
risk-based approach balances between regulatory control and trade facilitation. The main
focus of risk style is on dual enforcement and client service.

A risk based approach is

consultative and cooperative approach while the traditional style focuses on unilateral
approach. The risk management approach focuses on assessing the integrity of trade systems
and customs while the gatekeeper style focuses on assessing the nature of transactions
(Customs Partnership: A two way street 2005).
The risk approach employs flexible procedures and administrative discretion.


focus of risk base approach is on post-transaction compliance assessment. The risk
compliance management approach is an effective appeal mechanism. Traditional gatekeeper
risk management framework runs on the principle of indiscriminate intervention or 100
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percent check whereas risk approach focuses on high risk area and minimal intervention in
low-risk areas. The risk-based approach gives pre-approval report clearance on arrival of
cargo gods. The adoption of traditional gatekeeper style results in pending revenue payment
because of high maintenance of physical control. The management of risk-based approach
breaks the nexus between physical control and revenue liability. The risk approach also
rewards for recognised compliers.

Lastly the technology framework act as an enabler that

enhances the ability of administration to adopt risk management style (Customs Partnership:
A two way street 2005).
The prerequisites requirement of risk approach is appropriate communication and
information technology infrastructure. The IT framework provides automated processing and
clearance arrangements. The risk approach allows regulators to achieve maximum integration
with commercial systems. Hence, the risk base approach proposed by the Kyoto Convention
provides transparency and predictability for all those linked in international trade. The
approach meets the needs of international trade and customs authorities for facilitation of
customs procedures.

It ensures establishment of appropriate standards and control. The

approach ensures that simplified and harmonized principles are made obligatory on
contacting parties. Lastly, the risk approach allows customs authorities to respond to
changing business and administrative methods (International trade facilitation: the custom
imperative 2012).

Application of approach to resolve problem faced by Belmontia

In recent years, Belmontia has realized the importance of trade to achieve sustainable
economic growth. Accordingly, the country has a lower tariff, establishes regulatory regimes

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