Customs compliance is different from Customs law. Compliance is, of course, rooted on Customs law, however it is more focused on implementing those Customs rules and regulations. So how should we define Customs Compliance?
Customs compliance and Customs Law
Legality is the foundation of compliance. Laws prescribe conduct, impose sanctions and prohibitions. There is a vertical relation with the law that applies to every individual and company. Breaching these rules will result in penalties and sentences from a judge, in a court of law. Therefore, when we discuss Customs compliance, it goes beyond merely following the law, as complying with the law is, by definition, what the law entails. There’s more depth to it than that.
Customs Compliance is certainly grounded in the normative environment of Customs law. However, it is also concerned with prevention. It requires effective mechanisms and processes to be put in place to prevent the risk of breaching these rules.
Companies are therefore not only responsible for meeting their legal obligations under the law. They are also responsible for putting in place these effective controls to prevent the violation of the legislation. Internal processes must therefore be designed to prevent the risk of breaching the rules.
Customs compliance is the combination of legal understanding and internal processes designed to ensure that businesses fulfill their legal responsibilities.
These preventive mechanisms take the form of internal compliance programme, compliance policies and procedures as well as internal audits. Therefore, entrusting Customs Compliance to external sources can pose risks for businesses.
Origin of Customs Compliance
Customs controls historically occurred at the border, marking the conclusion of import or export procedures upon goods’ release from Customs clearance. However, the surge in trade volumes since the 1980s made it impractical to inspect every shipment and transaction. As a solution, in the 1990s, the enforcement of regulations shifted from Customs authorities to businesses.
Customs controls therefore moved from systematic checks at the borders to ad-hoc on-site Customs audits at businesses’ premises by Customs officers. This solution was welcomed, both by the trade community and Customs authorities, at the time.
In some countries, checks at the borders are still very much part of everyday Customs work. However, in many countries, border checks are based on risk management systems, focused targets and the control of goods deemed potentially risky, such as food products.
Traders must therefore internalise these Customs checks. For many companies, this is a change of culture.
Customs Law in Action
When goods are declared to Customs authorities at the border, the Customs risk management system cross-checks the information against various databases as well as the trader’s previous transactions. If any discrepancies are identified, the shipment may still clear and be delivered to the recipient. However, behind the scenes, Customs officers may initiate a control process, which could lead to an on-site audit.
During the on-site audit, Customs authorities thoroughly examine a company’s records, including contracts, documents, payments, and inventory. This is where pristine compliance records becomes an invaluable asset. Customs officers may focus solely on the specific Customs declaration under review. They may also extend their examination to past transactions. It’s worth noting that Customs declarations remain open for a number of years. It is a minimum of 3 years in the UK and the EU. The duration varies by country and transaction. Consequently, recurring errors in underpaid duty over time can rapidly accumulate into a substantial financial liability for the business.
Compliance therefore means that companies must monitor the Customs code and other regulations applicable to them, train the staff, translate the legislations into their internal processes and make sure they’re applied correctly.
Company are also increasingly asked to identify and report breaches. Traders are encouraged to use voluntary disclosures and incriminate themselves, essentially taking on the role of prosecuting authorities.
It is important to note that the rules for voluntary disclosures differ significantly between countries, especially those with civil law systems compared to common law systems. Moreover, some countries impose administrative Customs penalties, while others have criminal penalties so it is prudent to seek guidance.
Cross-departmental compliance
Customs compliance is an horizontal activity within a company crossing several departments and functions. For instance, Origin Rules will affect Sales and Procurement. This is because the origin of the goods plays a crucial role in deciding whether the transaction will incur duties. It will also impact on the Finance department. This because any mistakes in applying these origin rules can lead to unexpected duty expenses affecting the Cost of the Goods Sold potentially erasing profit margins.
The objective of Customs compliance therefore extends beyond risk reduction. It also safeguards the financial interests of the business and its investors.
Compliance shortfall
There are plenty of examples of what Customs compliance is not. Some companies are focusing on the practical side, neglecting the legal aspect. Some companies are for instance rarely updating their policies and procedures although Customs regulations are changing regularly.
This becomes problematic when facing disputes with Customs authorities. During such discussions with the authorities, the emphasis shifts to the legislation and its relevant provisions. This can reveal potential weaknesses in the company’s internal procedures if they are not aligned with the rules.
This is often the case in classification disputes. A company might have relied on the government online system to find a commodity code. However, during a Customs audit, the technical discussion will focus on General Rules of Interpretation.
On the other hand, we also meet clients where the legal department possesses a strong understanding of the Customs code. However, they lack insight into or influence over the everyday application of these rules across various sites and countries within their operations.
Management responsibility
Customs compliance is a dual activity, partly legal analysis, partly business management. It is a set of processes and procedures aligned with the law. It requires an understanding of the legislation and a capacity to develop and implement effective processes across different departments, sometime different entities and different countries.
Consequently, it needs a strong support from the company’s executive management and board to empower the internal Customs team to influencing the practices of other departments.
To conclude on a positive note, once compliant systems are in place, traders can deploy duty saving mechanisms to improve cash-flow and reduce the cost of the goods sold.
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