CUSTOMS

MATTERS
Strengthening Customs
Administration in a
Changing World

AUGUSTO AZAEL PÉREZ AZCÁRRAGA

TADATSUGU MATSUDAIRA
GILLES MONTAGNAT-RENTIER
JÁNOS NAGY
R. JAMES CLARK

©International Monetary Fund. Not for Redistribution

 © 2022 International Monetary Fund
Cover design: IMF Creative Solutions

Cataloging-in-Publication Data
IMF Library

Names: Pérez Azcárraga, Augusto, Azael, author. | Matsudaira, Tadatsugu,

author. | Montagnat-Rentier, Gilles, author. | Nagy, János, author. | Clark,
R. James, author. | International Monetary Fund, publisher.
Title: Customs matters : strengthening customs administration in a changing
world / / prepared by Augusto Azael Pérez Azcárraga, Tadatsugu Matsu-
daira, Gilles Montagnat-Rentier, János Nagy, and R. James Clark.
Other titles: Strengthening customs administration in a changing world.
Description: Washington, DC : International Monetary Fund, 2022. | May 2022. |
Includes bibliographical references.
Identifiers: ISBN 9798400200120 (book)
Subjects: LCSH: Customs administration. | Customs administration—Law and
legislation. | International trade.
Classification: LCC HJ6609.P47 2022

DISCLAIMER: The views expressed in this book are those of the

authors and do not necessarily represent the views of the IMF’s
Executive Directors, its management, or any of its members. The
boundaries, colors, denominations, and any other information
shown on the maps do not imply, on the part of the International
Monetary Fund, any judgment on the legal status of any territory
or any endorsement or acceptance of such boundaries.

Recommended citation: International Monetary Fund. 2022. Pérez Azcárraga,

Augusto Azael, Tadatsugu Matsudaira, Gilles Montagnat-Rentier, János Nagy,
and R. James Clark. Customs Matters: Strengthening Customs Administration in a
Changing World. Washington, DC: International Monetary Fund.

ISBNs: 979-8-40020-012-0 (paper)

979-8-40020-466-1 (ePub)
979-8-40020-464-7 (PDF)

Please send orders to:

International Monetary Fund, Publication Services

PO Box 92780, Washington, DC 20090, USA
Tel: (202) 623–7430 | Fax: (202) 623–7201
E-mail: publications@imf.org
Internet: www.elibrary.imf.org
www.bookstore.imf.org

©International Monetary Fund. Not for Redistribution

Contents

Foreword v
Abbreviations vii
Acknowledgments xi
Contributors xiii

Introduction 1

1 The Multifaceted Role of Customs and Its Importance

for the Economy and Society 5
Gilles Montagnat-Rentier and Christian Bremeersch

2 How Trade and Tax Policies Are Shaping Customs 33

Tadatsugu Matsudaira and Michael Daly

3 Institutional and Professional Foundations

of Modern Customs Administration 67
János Nagy and Hubert Duchesneau

4 Customs in a World of Enhanced Trade Facilitation 95

R. James Clark and Danielle Bernard

5 Strengthening the Core Customs Processes

through Integrated Risk Management 131
Augusto Azael Pérez Azcárraga and Rossana San Juan

6 Customs Enforcement and Cooperation

with Other Administrations 175
János Nagy and William LeDrew

7 Customs Administration and Digitalization 203

Tadatsugu Matsudaira and Jonathan Koh

Appendixes 235

Index 281

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

Foreword

Customs administrations have played an instrumental role in economic manage-

ment and development since ancient times. For many nations, collecting duties
at borders was the main source of income for hundreds of years until the early
20th century. Customs administrations have also helped collect data to define
trade policies and generate the balance of payments statistics. Today, collecting
duties and taxes on imports is only one of the responsibilities carried out by cus-
toms administrations. Their role has expanded to take on economic and social
dimensions, including helping address global challenges such as combatting pan-
demics and natural disasters and facilitating global supply chains.
The accelerating pace of global transformation in recent decades has seen an
ever-increasing volume and interdependence of international trade. With that,
new challenges have emerged for customs administrations: the digitalization of
trade and customs processes, the adoption of new technologies and business mod-
els, renewed national security and safety of society concerns, and revamped pro-
tectionism. Moreover, while the complexity of trade relations has increased,
customs administrations must respond to the trade community’s growing
demands for trade facilitation through the simplification, transparency, and pre-
dictability of customs procedures, as well as time and cost reductions.
The COVID-19 pandemic has been another turning point. The pandemic
proved that free and efficient international trade is essential for achieving an
inclusive, sustainable recovery everywhere. And it highlighted once again the
critical role that customs can play in streamlining the supply chains that support
economic activity and the importation of goods vital to combatting the pandemic.
The pandemic also tested customs capabilities around the world—including the
challenge of mobility restrictions and limits on in-person contacts—and empha-
sized the need to accelerate automation. These challenges highlight the need for
customs administrations to assess and strengthen their institutional practices and
processes, not just to improve their current operations but also to constantly
evolve, be more dynamic, and face the ever-changing environment in which they
operate.
Against this background, this book offers a cross-sectional view of the crucial
issues for policymakers and customs officials to consider when evaluating the
current state of their customs system. Its goal is to help them face emerging chal-
lenges strategically and build on broad practical experiences to develop, reinforce,
or advance their roadmaps for customs modernization and reform.

©International Monetary Fund. Not for Redistribution

vi Customs Matters: Strengthening Customs Administration in a Changing World

The book also reaffirms the IMF’s commitment to supporting its member
countries in these efforts by strengthening key institutions and their ability to
promote inclusive and sustainable growth and economic development. Likewise,
it expresses the IMF’s willingness to continue collaborating closely with our part-
ners, seeking to optimize everyone’s resources and generate synergies for our
membership.

Kristalina Georgieva
Managing Director

©International Monetary Fund. Not for Redistribution

Abbreviations

3D three-dimensional
AE advanced economy
AEO authorized economic operator
AI artificial intelligence
ACV automated contents verification
AO authorized operator
AR augmented reality
ASEAN Association of Southeast Asian Nations
ASYCUDA Automated System for Customs Data
ATD automated threat detection
AWB airway bill
B/L bill of lading
BNI banking negotiable instrument
BC blockchain
BCP business continuity plan
BI business intelligence
BIC Bureau International des Conteneurs et du Transport
Intermodal (English version: International Container
Bureau)
BNI banking negotiable instrument
BPR business process reengineering
BRS Conventions Basel, Rotterdam and Stockholm Conventions
CACM Central American Common Market
CAN Andean Community
CARICOM Caribbean Community and Common Market
CBM coordinated border management
CBP Customs and Border Protection
CEMAC Economic and Monetary Community of Central Africa
CET common external tariff
CITES Convention on International Trade in Endangered
Species of Wild Fauna and Flora
CCP Container Control Programme
CCTV closed-circuit television
CDP Committee for Development
CDT Contraband Detection Technology
CIF cost, insurance, and freight (Incoterm)
CIT corporate income tax
CFC chlorofluorocarbons
C/O certificate of origin
COMESA Common Market for Eastern and Southern Africa
CMAA Customs Mutual Assistance Agreement
CMS customs management systems
COVID-19 coronavirus disease 2019

vii

©International Monetary Fund. Not for Redistribution

viii Customs Matters: Strengthening Customs Administration in a Changing World

CPCH Customs/Police Cooperation Handbook

CPTPP Comprehensive and Progressive Agreement for
Trans-Pacific Partnership
CRPA Cognitive Robotic Process Automation
CSI Container Security Initiative
CT computed tomography
DLT distributed ledger technologies
DCMM Digital Customs Maturity Model
DPV duty paid value
DRP disaster recovery plan
EA enterprise architecture
EAC East African Community
EAEU Eurasian Economic Union
ECOWAS Economic Community of West African States
EITI Extractive Industries Transparency Initiative
EM emerging market
ERP enterprise resource planning
EU European Union
EUIPO European Union Intellectual Property Office
FA federated architecture
FAD Fiscal Affairs Department
FCS fragile and conflict-affected state
FOB free on board (Incoterm)
FTA free trade agreement
GAGR geometric average growth rate
GATT General Agreement on Tariffs and Trade
GATS General Agreement on Trade in Services
GCC Gulf Cooperation Council
GDP gross domestic product
GDPR (EU’s) General Data Protection Regulation
GRI Global Risk Index
GPS Global Positioning System
GRP government resource planning
GSP generalized system of preferences
GVC global value chain
HQ headquarters
HR human resources
HS Harmonized Commodity Description and Coding
System (Harmonized System)
HUD head-up display
HMD head-mounted display
IaaS infrastructure as a service
ICS import control system
ICT information and communication technologies
ID identification number
IMF International Monetary Fund
IMO International Maritime Organization

©International Monetary Fund. Not for Redistribution

 Abbreviations ix

Incoterms International Commercial Terms of the International

Chamber of Commerce
IoT Internet of Things
IOTA Intra-European Organization of Tax Administrations
IPR intellectual property rights
IRM integrated risk management
ISOCA International Survey on Customs Administrations
ISORA International Survey on Revenue Administrations
ITC International Trade Centre
JFO Joint Forces Operations
K9 canine
KPI key performance indicator
LC letter of credit
LDC least developed country
LIC low-income country
LLDC landlocked developing country
MERCOSUR Southern Common Market
MI management information
ML machine learning
MOF Ministry of Finance
MOU memorandum of understanding
NAFTA North American Free Trade Agreement
NTFC national trade facilitation committee
NII nonintrusive inspection
NLP natural language processing
NTM non-tariff measures
ODS ozone-depleting substances
OECD Organisation for Economic Co-operation and
Development
OGA other government agencies
OJT on-the-job-training
OPMS operational performance management system
OSBP one-stop border post
PaaS platform as a service
PCA post-clearance audit
PCS Port Community System
PDPA (EU’s) Personal Data Protection Act
PSCG WCO Private Sector Consultative Group
PPE personal protective equipment
RA revenue administration
RCEP Regional Comprehensive Economic Partnership
RFID radio-frequency identification
RKC Revised Kyoto Convention
RMC Risk Management Committee
RoO rules of origin
RPA robotic process automation
RTA regional trade agreement

©International Monetary Fund. Not for Redistribution

x Customs Matters: Strengthening Customs Administration in a Changing World

SaaS software as a service

SACU Southern African Customs Union
SAFE SAFE Framework of Standards to Secure and Facilitate
Global Trade
SALW Small Arms and Light Weapons
SEZ special economic zone
SPV special purpose vehicle
STCP Strategic Trade Control Plan
SW single window
SWOT strengths, weaknesses, opportunities, and threats
TBT technical barriers to trade
TIN tax identification number
TiVA trade-in value added
TFA Trade Facilitation Agreement
TOR terms of reference
TRIPS Agreement on Trade-Related Aspects of Intellectual
Property Rights
TTP trusted trader program
UFF unified file format (of scanned images)
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNEP United Nations Environment Programme
UNECE United Nations Economic Commission for Europe
UNODC United Nations Office on Drugs and Crime
USAID United States Agency for International Development
USD US dollar
VAT value-added tax
VAL valuation agreement
VR virtual reality
WAEMU West African Economic and Monetary Union
WMD weapons of mass destruction
WCO World Customs Organization
WEO World Economic Outlook
WTO World Trade Organization

©International Monetary Fund. Not for Redistribution

Acknowledgments

We started this project thanks to the encouragement of Michael Keen, who has
always recognized the relevance of customs administration for fiscal performance
and sustainable development. He set this vision in the book Changing Customs:
Challenges and Strategies for the Reform of Customs Administrations, which he
edited in 2003. As we publish this new IMF customs book two decades later, we
offer our sincere thanks to Katherine Baer, who has been an enthusiast of this
project since the beginning and has provided invaluable guidance, and to the
senior managers of FAD’s Revenue Divisions that oversee our capacity develop-
ment programs for tax and customs administrations: Debra Adams, Andrea
Lemgruber, Margaret Cotton, Andrew Masters, Andrew Okello, and Rebecca
Sparkman, who have given enormous support during this journey.
This book reflects the teamwork, dedication, and knowledge sharing among
FAD senior customs specialists who drew on significant experience gained over
many years providing capacity development to customs administrations in emerg-
ing markets and developing countries. We acknowledge the outstanding contri-
butions of several FAD’s external customs experts who helped us draft the various
chapters: Danielle Bernard, Christian Bremeersch, Michael Daly, Hubert
Duchesneau, Jonathan Koh, Willian Ledrew, and Rossana San Juan. Our thanks
go also to FAD’s customs long-term advisors, Rachel Auclair, Stephen Cox, Selvin
Lemus, Stephen Mendes, David Smith, and Philip Wood, for their valuable
comments.
This project would not have been possible without the expertise, patience,
wisdom, and personal warmth of Barbara Hebert, the book’s main technical edi-
tor. Her thorough review and inputs have been extremely useful. Special thanks
to Robert Kokoli, FAD senior customs specialist, who supported the technical
review and provided helpful insights.
We greatly appreciate the kind support of the international organizations that
generously shared their experience, provided inputs, and took the time to peer
review the book: The World Customs Organization, through Tadashi Yasui, who
summarized the comments of the World Customs Organization reviewers; Alina
Antoci, William Gain, Ernani Checcucci, José Gutiérrez Ossio, from the World
Bank; and Sandra Corcuera and José M. García Sanjinés from the Inter-American
Development Bank.
We thank our colleagues from the IMF’s Communications Department:
Rumit Pancholi, Wala’a El Barasse, and Patricia Loo, for their excellent contribu-
tions during the editing and publication process.

xi

©International Monetary Fund. Not for Redistribution

xii Customs Matters: Strengthening Customs Administration in a Changing World

We reserve our greatest appreciation to the IMF member countries’ customs

administrations and their management teams and staff, from whom we have
learned so much over the years. This book acknowledges these officials who,
despite the daily challenges faced in carrying out their functions, are committed
to introducing substantive reforms to improve the performance of their organiza-
tions, thus contributing to their country’s economy, society, and security. Thank
you for believing that customs matters.

©International Monetary Fund. Not for Redistribution

Contributors

Danielle Bernard has 20 years of customs experiences with the Canadian

customs administration and is an accredited Technical and Operational Advisor
in Post-Clearance Audit for the World Customs Organization. She has experi-
ence in customs administration capacity building in the areas of risk management
and Post-Clearance Audit, conducting diagnostic missions and assisting in the
development of an advanced Post-Clearance Audit case study workshop with the
World Customs Organization.

Christian Bremeersch spent his career in the French customs administration,

with the exception of periods of secondment as customs resident advisor to
Burundi (five years) and Mali (one year) on behalf of the French Ministry of
Cooperation, and to the Democratic Republic of Congo (two years) on behalf of
the IMF. He has extensive experience in customs administration capacity building
in Francophone Africa as a short-term expert in the IMF’s Fiscal Affairs
Department.

R. James Clark has more than 20 years of experience as a senior leader and direc-
tor with Canada customs administration and has worked in internationally in
capacity development on customs modernization, trade facilitation, public service
management and leadership. He is accredited by the World Customs Organization
as a Custom’s Modernization Expert and led the development of their Post-
Clearance Audit Advanced Workshop. He has conducted missions in Africa, Asia,
Central Asia, the Caribbean, South America, and Central America. He has been
a headquarters-based expert for the IMF and is a short-term expert for the IMF
as well as the World Bank.

Michael Daly has been an external tax and trade policy expert with the IMF’s
Fiscal Affairs Department since 2006. Having worked in the Tax Policy Branch
of Canada’s Ministry of  Finance, the European Commission, the Economics
Department of the Organisation for Economic Co-operation and Development,
and the World Trade Organization’s Trade Policies Review Division, he has 40
years of experience encompassing a wide range of tax and trade-related policies.

Hubert Duchesneau, a customs modernization and capacity building consul-

tant, has had a policy, operational, and organizational development career with
the Canada Border Services Agency and the World Customs Organization. His
research and practice interests include institutional and professional development,
notably frontline training and leadership, integrated border management, cus-
toms-private sector partnerships, and the promotion of integrity.

xiii

©International Monetary Fund. Not for Redistribution

xiv Customs Matters: Strengthening Customs Administration in a Changing World

Jonathan Koh, managing director of Trade Facilitation Pte Ltd, is a trade and
customs consultant with more than 25 years of experience. He had worked in
more than 70 countries, covering an eclectic range of projects including paperless
trade/digital transformation, customs automation and national single windows,
port community systems, trade facilitation strategy roadmap and performance
measures, special economic/free trade zones, and regional connectivity platforms.

William LeDrew spent 28 years with the Canadian customs service rising to the
level of Director General in charge of enforcement. In 1996, he accepted an
assignment with the Fiscal Affairs Department of the IMF as a senior customs
advisor to the government of Malawi (1996–98). After this, he was appointed as
Collector of Bermuda Customs, a position he held for three years (1998–2001).
He then spent three years as the Fiscal Affairs Department’s resident customs
advisor in Cambodia (2001–03). In addition, he has provided technical assistance
to about 30 developing countries with the World Bank, the International Finance
Corporation, regional development banks such as the Asian Development Bank
and the Inter-American Development Bank, the Association of South East Asia
Nations, and private sector consultancy organizations.

Tadatsugu Matsudaira, Senior Economist, has been working with the IMF
Fiscal Affairs Department since 2017. He covers wide spectrum of customs
reform and modernization as well as project design and management based on
more than 30 years of experience through Japan customs and the Ministry of
Finance, the Organisation for Economic Co-operation and Development, the
World Customs Organization, and the World Bank.

Gilles Montagnat-Rentier, a senior economist and former manager with the

French customs administration, has been working with the IMF Fiscal Affairs
Department since 2003 to advise on customs reform and modernization. His
current main focus areas are revenue mobilization in Africa, trade facilitation,
regional integration, customs procedures for the extractive industries, and chal-
lenges faced by fragile and conflict-affected states.

János Nagy has 43 years of experience in customs having spent 25 years in the
Hungarian customs and excise administration, and financial criminal investiga-
tion service, including five years as Deputy Director General and seven years as
Director General, and one year in the Ministry of Finance as Head of the
European Anti-Fraud Office National Bureau. He served five years at the World
Customs Organization Secretariat as Head of Service for technical assistance,
reforms and modernization, as well as customs integrity. He managed and deliv-
ered IMF customs-related technical assistance programs as a senior economist
from 2012 to 2021.

A. Azael Pérez Azcárraga has more than 27 years of experience in customs. He

is a senior economist in the IMF’s Fiscal Affairs Department, responsible for the

©International Monetary Fund. Not for Redistribution

 Contributors xv

coordination of capacity development for customs administrations for Latin

America and the Caribbean. Mr. Perez has led major modernization reforms
helping countries improve trade facilitation and customs collection efficiency,
while protecting their borders. He previously served for 17 years at the tax and
customs administration of Mexico in several positions: Director of Customs
Offices, Deputy Director General of Foreign Trade Intelligence, and Deputy
Director General of Post-Clearance Audit. He was accredited by the World
Customs Organization as a Customs Modernization Expert.

Rossana San Juan is an economist with a master’s degree in economics. She cur-
rently works for Uruguayan customs and is an expert in risk management accred-
ited by the World Customs Organization. Since 2015, she has worked as a cus-
toms expert for the IMF’s Fiscal Affairs Department primarily in the Americas
region as well as other regions for the World Bank. Her main focus as a consultant
is risk management and data analysis methods.

Barbara Hébert is retired from the Canadian public service after a 27-year career
with the customs and tax revenue administrations and the Canada Border
Services Agency, where she was a senior vice president responsible for operations.
Throughout her career she held a variety of positions, including executive ones in
both regional and headquarters settings. She has worked as a short-term expert
with the IMF Fiscal Affairs Department since 2010 and has been involved in
missions focused on reform and modernization of tax and customs administra-
tions in the Caribbean, Africa, Europe, Asia, and South America.

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

 INTRODUCTION

Trade in goods could not properly flourish without rules. It is not surprising,
therefore, that customs continues to play an important role in the modern econ-
omy and society. The raison d’être of this state administration is to ensure that
international trade in goods is conducted in accordance with the laws and rules
currently in force. It is this administration that ultimately authorizes (or does not
authorize), the entry and exit of goods from the customs territory. The benefits
of a well-performing customs administration are clear, including revenue mobili-
zation (in many countries, customs plays a key role in collecting tax revenue),
reduction in wait times and transaction costs, enhanced safety and security, and
the promotion and resilience of international value chains. Particular attention
must therefore be paid to the efficiency, effectiveness, fairness, and modernization
of customs administrations.
The IMF devotes a significant part of its activity to capacity building in devel-
oping countries, including in customs. In 2015, the Addis Ababa Program of
Action and Agenda 2030 for Sustainable Development (SDG 17.1) targeted the
strengthening of national revenue collection capacities as the main source of long-
term and stable financing for sustainable development. IMF research released in
March  2021 shows that  low-income developing countries  have to deploy
some $200 billion over five years just to fight the COVID-19 pandemic and then
another $250 billion to return to the path of catching up to countries with higher
income levels (IMF 2021). Mobilizing domestic revenue will be critical to help
countries address increasing and/or high debt levels in addition to external con-
cessional financing that has been made available to many low-income countries
as a result of the pandemic. While tax administration is at the forefront of this
agenda, customs is clearly involved: customs duties and taxes levied on interna-
tional trade will remain an important source of revenue for many developing
countries for a long time to come. Optimizing collection of these duties and taxes
remains a necessity, and it should be done with the least harmful consequences
for trade flows.
This book follows a previous work, Changing Customs—published in 2003 by
the IMF—which made the case for modernization and reform in customs admin-
istrations and laid a path to strengthened and improved customs administrations
at the beginning of the 21st century. Since that volume was completed, the need
for modernization has become more urgent because of increased globalization,
integrated supply chains, and rapid technological advances. In addition, the con-
vergence of the COVID-19 pandemic, conflicts, and climate change have eroded
many gains made in the past 25 years in reducing world poverty—according to
the World Bank’s World Poverty Overview. Now more than ever, governments
need to promote economic growth and mobilize resources to address widening
cracks in social systems. Customs administrations must push harder to modernize

©International Monetary Fund. Not for Redistribution

2 Customs Matters: Strengthening Customs Administration in a Changing World

and implement their critical programs and processes so that they can play their
part in facilitating trade and business, mobilizing revenue, and protecting
society.
Even though this book places more emphasis on the fiscal role of customs, the
modernization of customs administration must also consider core challenges
relating to trade facilitation and border (and societal) protection. This requires
reconciling the rapid, unhindered, and low-cost movement of legitimate trade
through trade facilitation, layered with effective risk-based control and the fight
against fraud and trade in prohibited goods. Failure to achieve this balance (which
also involves other administrations that may be present at the border and that
play other key roles in facilitating trade) will affect economic activity, public
finance, and society.
In this book, we describe and analyze current challenges to customs adminis-
tration and  propose some ways to address them. In particular, this work high-
lights the lessons that the IMF, and more specifically its Fiscal Affairs Department
(FAD), has garnered from the many successful capacity development efforts that
have been undertaken to date. At the heart of this book, as of all FAD’s work in
this area, is the potential for extremely positive effects, for both the public and
private sectors, to be gained from customs modernization given the constant and
rapid changes in the form, scale, and nature of international trade and, more
generally, in economies and societies.
This book focuses primarily on international cargo. It should be noted, how-
ever, that customs also  has to deal with people crossing a border. While the
authorization of a person to cross a border is an immigration matter, the status of
goods accompanying that person, including vehicles and personal items, is a
customs matter. Customs rules apply to all goods, even though significant simpli-
fications of procedures have been adopted to facilitate international travel (such
as the requirement, in most situations, of merely a verbal or tacit customs decla-
ration by the international traveler). The task of customs is also complicated by
the movement of persons for illicit reasons and transportation by  travelers of
prohibited or restricted goods. Given the considerable and increasing number
of international travelers and border crossing points, this is an important respon-
sibility of customs administrations.
The previous IMF book on customs modernization laid a foundation for key
reforms, and many of the lessons from that book remain relevant. This volume
does not supersede the ideas presented there; rather, it builds upon them, touches
on crucial challenges facing current administrations, and suggests approaches to
working through them.
Chapter 1 is an overview of the multifaceted role of customs, its importance
for the economy and society, and how it has evolved into its current role.
Chapter 2 examines the impact of trade and tax policies on customs, highlighting
how these policies have shaped customs’ response to modern integrated supply
chains. Chapter 3 is a deeper dive into the institutional and professional founda-
tions of customs. It discusses the need for robust management practices relating
to customs reform and modernization, legislative and regulatory frameworks,

©International Monetary Fund. Not for Redistribution

 Introduction 3

learning and development, and good governance and accountability. It includes

practical examples to assist the customs administration with developing their
own key performance indicators (KPI).
From the foundations of modern customs administration, we move to
Chapter 4, where the challenges of enhanced trade facilitation and customs’ role
in supporting a pro-trade national economy are examined. A roadmap is included
for customs administrations to become more transparent, with processes that are
simplified, harmonized, and standardized to be more trade-friendly.
Chapter 5 examines strengthening core customs processes through integrated
risk management and explains how this critical practice has many benefits from
both the enforcement and trade facilitation perspectives. It includes a practical
guide to assist customs administrations to identify control gaps by comparing
their current performance against good practices, aiding them to develop their
own roadmap for improvement.
A key role for customs is enforcement, and Chapter 6 examines strategies for
strengthening this critical function. The challenges and risks associated with fraud
and anti-smuggling enforcement are discussed and guidance provided on devel-
oping a robust enforcement program with an emphasis on the value of informa-
tion sharing.
Finally, Chapter 7 looks forward to new and emerging technology and how it
may be used to improve customs performance. The chapter also examines why
previously implemented technologies sometimes do not produce the expected or
desired results. The book offers some country examples, whose main objective is
to inspire and connect customs administrations to share experiences and lessons
learned beyond assessing their success.
While providers and beneficiaries of capacity development agree on the impor-
tance of customs and its modernization and the practical steps needed to achieve
it, the challenges of customs modernization vary from country to country
depending on the starting point in each case. This book reflects that many chal-
lenges to be overcome are common to all countries and that there is a wealth of
experience on how to move forward.

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

 CHAPTER 1

The Multifaceted Role of Customs

and Its Importance for the
Economy and Society
Gilles Montagnat-Rentier and Christian Bremeersch

However essential it remains in all countries with a value-added tax (VAT) sys-
tem, and especially in developing countries, the collection of taxes on imports is
today only one of the facets of the role of customs. This role has also taken on
economic and societal dimensions and confronts many major global challenges.
Thus, the customs administration’s mission is composed of three elements, all
related to international trade in goods: the fiscal element (revenue collection,
directly and in support of the tax administration), the economic element (imple-
mentation and oversight of certain government economic policies), and the pro-
tection and security element (safeguard of citizens’ health and protection of
society from transborder criminal activity). The relative importance and priority
of the roles and functions of customs may vary depending on geographical, eco-
nomic, and other features of the country, yet the three core elements are system-
atically present. This chapter first gives an overview of these many and diverse
customs responsibilities. It then briefly presents the typical processes implement-
ed by the customs administration and highlights a few major trends in its
environment.

THE FISCAL ELEMENT OF THE CUSTOMS’ MISSION

International Trade Growth Has Been Slowing Down
The imports of goods—and exports for some countries, though to a lesser
extent—constitute the basis for customs revenue. After several decades of contin-
uous growth, slower trade growth resulted from structural change coinciding with
the global financial crisis in 2008–10 (see Figure 1.1). Between 2001 and 2008,
the volume of world trade in goods grew annually by 5 percent, which was per-
sistently faster than the annual GDP growth of 3.9 percent. Consequently, inter-
national trade was considered to be an important “engine of growth.” After the
2008 financial crisis, however, the average annual growth of world trade slowed
to 3.8  percent. In terms of value, the slowdown was more marked, with the

©International Monetary Fund. Not for Redistribution

6 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 1.1. World Merchandise Trade Volume, 2000–21

(Index 2015 = 100)
Merchandise trade Trend 1990–2008 Trend 2011–18
140
130
120
110
100
90
80
70
60
50
40
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: World Trade Organization 2020.

Figure 1.2. Changes in the Volume of International

Merchandise Trade, 2005–20
(Rate of change in volume of merchandise exports and imports, quarterly.
Index 2005 = 100)
Developed Developing Transition World
economies economies economies
220

200

180

160

140

120

100

80
2005 2008 2010 2012 2014 2016 2018 2020
Source: United Nations Conference on Trade and Development 2021.
Note: The figure shows the average of imports and exports.

average annual growth of world trade value being merely 0.2 percent from 2011
to 2018. As a result, international trade in goods decreased from 50.2 percent of
GDP in 2011 to 46.1 percent in 2018, while international trade in services con-
tinued to grow, rising from 11.8 percent to 13.4 percent of GDP (World Bank,

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 7

2020). Figure 1.2 shows comparable trends by type of economy, although devel-

oping economies’ international trade is growing faster and transition economies
are experiencing more variation.
Although the beginning of 2020 gave hope that trade tensions would ease, the
health and economic crisis caused by the coronavirus disease 2019 (COVID-19)
pandemic greatly affected global trade. Overall, world trade recorded a drop in
value of about 9 percent in 2020, with trade in goods declining by about 6 percent
and trade in services decreasing by about 16.5 percent (Global Trade Update 2021).
As the pandemic was still ongoing during the development of this book, trade vol-
umes were expected to grow 10.8 percent in 2021 and 4.7 percent in 2022 (World
Trade Organization 2021), however, remaining below the precrisis trend.

Tariffs Will Remain an Important Source of Revenue

The data in Table  1.1 on average tariffs by country income group and region
show that the rates remain significant. Yet these figures should not obscure the
significant trade liberalization that has taken place, including in countries that
continue to apply high tariff rates. As Keen pointed out (2003), trade liberaliza-
tion is not limited to the reduction of tariff schedules and export taxes, the latter
mostly found today on natural resources, but also includes the reduction of a
range of restrictions on trade flows. In this respect, a fundamental aspect has been
the conversion of quantitative restrictions on imports into explicit customs duties,
a measure that tends—provided that duties on goods’ quotas are not collected in
the form of sales of import licenses—to increase both rates and revenues.
Moreover, where tariff rates are set at levels that aim to be protectionist and rev-
enue maximizing—with the understanding that prohibitive rates do not increase
revenue—small reductions in these rates have been shown to increase tariff reve-
nue. All this considered, and even though trade liberalization must ultimately
reduce revenue from customs duties, for many years to come, particularly in
developing economies, customs duties will remain an essential component of
public revenues and finances.

TABLE 1.1.

Simple Average Tariff Applied, 2018–19

(Most-Favored Nation, Percentage)
Advanced Economies Emerging Markets Low-income Countries
All commodities 3.9 8.7 11.2
Agricultural 15.7 14.6 15.5
Nonagricultural 2.0 7.8 10.5
Latin
East Asia & Europe & America & Middle East & Sub-Saharan
Pacific Central Asia Caribbean North Africa South Asia Africa
All commodities 6.1 5.8 9.6 9.1 13.3 11.4
Agricultural 12.2 15.5 14.2 17.9 21.7 15.1
Nonagricultural 5.1 4.3 8.8 7.7 12.0 10.8
Source: World Trade Organization and authors’ calculations (2021).

©International Monetary Fund. Not for Redistribution

8 Customs Matters: Strengthening Customs Administration in a Changing World

Because today customs duties are designated generally in ad valorem terms,

that is, based on the value of the goods, verification of the value declared by trad-
ers is an essential task of customs administrations. Regarding imports, the World
Trade Organization (WTO) has established standard rules for the determination
of the value, the basic principle of which is the use of the transaction value.
Customs valuation is discussed in Chapter 2.

The Role of Customs in Domestic Tax Collection

Customs plays a crucial role in the enforcement of “VAT collected by customs
indirect tax regimes at the border. Indirect taxes—
on imports represents more
mostly the VATs (or sales taxes in countries where
a VAT has not been adopted) and excise duties— than 50  percent of total
are generally levied according to the destination of VAT collected in many
the products, which means that any product countries.”
intended for domestic consumption is taxed at the
same rate whether it is produced locally or imported, while exported products are
exempt or relieved from duties and taxes. Hence, customs administrations are
responsible for ensuring that products entering the territory of a given country
pay all applicable duties and taxes upon clearance and that goods declared for
export actually leave the territory free of indirect taxation and are not returned
to  the  domestic market. The number of countries adopting VAT reached 165
in  2020, compared with 45 countries in 1990. Most of those countries that
recently adopted VAT were developing countries, including 25 low-income coun-
tries (see Figure 1.3).

Figure 1.3. Number of Countries Adopting a VAT

High income Upper middle income Lower middle income Low income

180
160
25
24 24
140 24 24 24 24 24
20 22 22 22 23
20
19 19
120 17 18 41 42 43
12 15 17 39 39 40 40 41 41
11 36 37 38 38
100 11 36 36
36
9 10 10 31 32 33 34
35
7 27 31
80 6 19 20 22
6 17 17 45 46 46
42 43 43 44 45 45 45 45 45 45
60 4 15 30 30 32 33 33 36 39 40
29 29
3 25 27 28 28
11 21
40 9 19
6 10
49 50 51
20 40 40 40 41 43 44 44 44 44 44 44 44 45 45 45 45 45 45 46 46 47 47 47
27 29 30 34 37
0
19 0
19 1
19 2
19 3
19 4
19 5
19 6
19 7
19 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
20 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
20 8
20 9
20
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
0
0
1
1
1
1
1
1
1
1
1
1
19

Source: Keen 2020.

Note: VAT = value-added tax.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 9

Borne by the final consumer, the VAT consists of a tax levied at each stage of
production: the VAT collected on the imported good is deducted from that pay-
able when the good is sold or is refunded when the imported good is later export-
ed or used as an input and the amount of tax collected on importation exceeds
that applicable to the finished product. The VAT therefore applies to all taxable
imports, whether the imports are intended for consumption or production. Thus,
a significant part of the VAT revenue is collected on imports. Most of this revenue
may be deducted or offset at later stages of the production or distribution cycle
or, in some cases, at export, but, more important, for many developing countries,
a significant share of VAT and excise revenue is collected at the border.
Figure 1.1 provides highlights of the importance of revenue collections by
customs administrations. While customs revenue as a percentage of GDP is high-
er in emerging market countries, it represents a larger share (about one-third) of
total tax revenue in low-income countries. VAT on imports accounts for the
largest source of revenue collections by customs, especially in emerging market
economies. The amount of VAT collected on imports compared with total VAT
is very large in emerging market economies and low-income countries yet remains
significant even in advanced economies.

Figure 1.1. Highlights of Revenue Collections by Customs

Administrations, 2017
1. Customs revenue 2. Customs revenue
(percent of GDP) (percent of total tax revenue)

6 5.7 40 37.2
4.7 35
5
30 27.7
4 25
3.1
3 20
15 12.9
2
10
1 5
0 0
Emerging Low-income Advanced Emerging Low-income Advanced
markets countries economies markets countries economies

3. VAT collected on imports 4. VAT collected on imports

(percent of total customs revenue) (percent of total VAT collections)
60
56 55.0 53.3
54 50
42.9
52 40
50
30
48 47.8
47.1 20.6
20
46
44 10
42 0
Emerging Low-income Advanced Emerging Low-income Advanced
markets countries economies markets countries economies
Source: staff calculations.

©International Monetary Fund. Not for Redistribution

10 Customs Matters: Strengthening Customs Administration in a Changing World

CUSTOMS’ RESPONSIBILITIES CONNECTED TO

OTHER ECONOMIC OBJECTIVES
The subsequent elements are general. Further discussion of customs procedures
with economic impact, special economic zones, and incentives follows in Chapter 2.
Chapter 4 discusses trade facilitation in more detail.

Implementing Trade Policy

The number of regional trade agreements (RTAs)
“Implementing regional
has increased significantly in the past two decades.
RTAs are reciprocal preferential trade agreements trade agreements, particu-
between two or more partners, which are autho- larly verifying the origin of
rized under the WTO subject to a set of rules. goods, remains a complex
According to the WTO, 321 such agreements task for customs adminis-
were in force as of February  2021, 242 of them trations, requiring interna-
since 2000.1 Only 17 of these agreements are cus-
tional cooperation.”
toms unions (see Table  1.2), and the remainder
are free trade areas;2 however, existing customs unions involve a large number of
countries.3 Intrazone trade varies considerably among these agreements. According
to WTO and United Nations Conference on Trade and Development (UNCTAD)
estimates, the European Union (EU) and the North American Free Trade
Agreement (NAFTA) recorded 64  percent and 50  percent of intra-RTA trade
respectively in 2017. The same year, the share of intracommunity trade was
24 percent in the Association of Southeast Asian Nations (ASEAN) and 13 per-
cent in the Southern Common Market (MERCOSUR), while for the Common
Market for Eastern and Southern Africa (COMESA) and the Economic and
Monetary Community of Central Africa (CEMAC) this trade represented only
8 percent and 2 percent of their exports respectively.
Although implementation of many provisions of RTAs is under the responsibil-
ity of customs authorities, a specific challenge is the implementation of the prefer-
ential origin rules, which condition removal or reduction of tariff—within free
trade areas and within the customs unions that have not implemented a free circu-
lation principle yet. Difficulties stem from the complexity of origin rules, their
differences from one agreement to another, and the cooperation with other customs
administrations, which, in many instances, is not only necessary but mandatory to
enforce these rules. On imports, customs must ensure that goods imported under

1
Some of the new agreements are amendments to earlier RTAs, 119 of which have ceased to be
applied since 2000.
2
Examples of major multilateral free trade areas include the 2018 Comprehensive and Progressive
Agreement for Trans-Pacific Partnership, a new version of the initial Trans-Pacific Partnership, and
the 2020 Regional Comprehensive Economic Partnership.
3
The member countries of a customs union agree to allow free trade on products between them and
to implement a common external tariff with respect to imports from the rest of the world. Free trade
area members do not have a common trade policy toward nonmembers.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 11

TABLE 1.2.

Customs Unions Notified to the World Trade Organization

Customs Union Name Entry into Force
Central American Common Market (CACM) 1961
Andean Community (CAN) 1988
Caribbean Community and Common Market (CARICOM) 1973
Economic and Monetary Community of Central Africa (CEMAC) 1999
Common Market for Eastern and Southern Africa (COMESA) 1994
East African Community (EAC) 2000
Eurasian Economic Union (EAEU) 2015
Economic Community of West African States (ECOWAS) 1995
European Union (EU) 1958
EU-Andorra 1991
EU-San Marino 2002
EU-Turkey 1996
Gulf Cooperation Council (GCC) 2003
Southern Common Market (MERCOSUR) 1991
Russian Federation-Belarus-Kazakhstan 1997
Southern African Customs Union (SACU) 2004
West African Economic and Monetary Union (WAEMU) 2000
Source: World Trade Organization 2022.

the agreement comply with the rules of origin to protect revenue and prevent unfair
competition. On exports, it may need to confirm eligibility to preferential treat-
ment at destination, which extends to advising domestic producers while ensuring
that the country’s international commitments are respected. It may be noted that
unilateral tariff reductions granted by developed countries to developing countries
under the Generalized System of Preferences raise similar administrative issues.

Supporting Competitiveness
To meet the different needs of businesses and to promote their competitiveness,
customs regulations offer special procedures. Often known as customs procedures
with economic impact, they are intended for both trade and industry and allow
goods to be stored (customs warehousing procedures), assigned to a specific use
(temporary admission procedures), or processed
(inward processing procedures). These arrange- “Customs special procedures
ments all suspend the obligations normally relat- can be effective tools to pro-
ing to imports, both for the payment of customs mote economic activities
duties and taxes and for compliance with the rules including manufacturing.”
of commercial policy. Their use has become wide-
spread and requires customs to set up specific organizational roles, systems, and
methods for monitoring the undertakings. Customs, on the one hand, is mandat-
ed to simplify formalities, while, on the other hand, it should ensure that goods
are not misused and are eventually re-exported or correctly declared if they remain
in the country. In the case of inward processing, customs also assesses manufac-
turing processes to ensure that all imported inputs under suspension have been
incorporated into the production declared at the end of the scheme.

©International Monetary Fund. Not for Redistribution

12 Customs Matters: Strengthening Customs Administration in a Changing World

The free zones, also known as special economic zones, offer companies the same
customs advantages as customs procedures with economic impact and, practically,
the goods located in free zones are regarded as being outside the customs territory
with respect to import duties and taxes.4 However, they generally combine with
various other investment incentives: exemption or reduction of direct and indirect
domestic taxation,5 reduction of obligations imposed on employers by labor law
regulations, and simplified administrative formalities for the movement of goods.
The proliferation of these zones is such that, whereas in 1997 there were 845 of
them in 93 countries, there were 5,400 special economic zones in 147 countries in
2018—and at least 500 more special economic zones were in the pipeline
(UNCTAD 2019). The Organisation for Economic Co-operation and
Development (OECD) and the European Union Intellectual Property Office
together consider that this increase has encouraged the production and trade of
counterfeit products and other criminal activities, such as money laundering. To
address risks related to revenue, intellectual property, and security, in particular,
free zones should remain under customs control and should be well delimited and
physically protected. Movements of goods between them and the rest of the terri-
tory should be electronically managed and connected to customs systems and the
data used for traceability, surveillance, and control (Omi 2019).
Many countries, developing countries in particular, make extensive use of
direct duty and tax exemption of imports to promote investment and support
social objectives. It is not unusual, for example, for the foregone revenue from
customs exemptions to equate to one-third of customs-collected revenue in sub-
Saharan African, Caribbean, and Latin American countries. Administration of
multiple and large-scale exemption schemes is problematic for customs. First,
these measures represent a heavy administrative load that mobilizes significant
resources, which are no longer available for more productive tasks. Second,
exemptions are prone to abuse, resulting in revenue leakage and unfair competi-
tion between economic actors. The exempted commodities, authorized uses, and
beneficiaries must be precisely defined by the law, which is not always the case,
and customs should implement specific procedures and programs to prevent and
detect noncompliance, not only at the point of entry but also after release of
exempted goods to the domestic market. There has been little change in the nec-
essary rationalization of customs exemptions in developing countries, and the
monitoring and control challenges for customs administrations remain.

Trade Facilitation
The general principles of trade facilitation—that is, measures to simplify customs
clearance and reduce its cost and time—are laid down in Article V (Freedom of
Transit), Article VIII (Fees and Formalities Connected with Importation and

4
With respect to customs control legal powers, the IMF Fiscal Affairs Department (FAD) has consis-
tently advised that special economic zones be considered parts of the customs territory.
5
Except for least developed countries, reduction of direct domestic taxation may be WTO-inconsistent.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 13

Exportation), and Article X (Publication and Administration of Trade Regulation)

of the General Agreement on Tariffs and Trade 1994. To expedite the movement,
release, and clearance of goods, the WTO Ministerial Conference held in Doha,
Qatar, in 2001 decided to have these principles reviewed and, if necessary, clari-
fied and improved and the needs and priorities of countries identified. This work
concluded with the coming into force in February  2017 of the WTO Trade
Facilitation Agreement (TFA), which includes and clarifies all relevant measures
in this area.
Modalities of implementation of the TFA are “According to the WTO,
adapted to the capacities of developing countries,
the full implementation of
especially least developed countries.6 The latter,
unlike developed countries that committed them- the TFA could reduce the
selves to implement the TFA as soon as it is adopt- costs of trade by an average
ed, benefit from special and differential treatment of 14.3  percent with an
that allows them to determine individually the even greater reduction for
pace at which they will implement the provisions African countries and least
of the agreement and to benefit from support,
developed countries.”
including financial support, when necessary.
More than 90 percent of developing countries and least developed countries
have to date identified the provisions that they will be able to implement after a
transition period and those for which they will need support in order to imple-
ment the agreement fully. The TFA is expected to give a decisive impetus to the
implementation of key measures for the strengthening of trade facilitation, and
customs is one of the main actors in this implementation.

The Application of Trade Defensive Measures

Three WTO agreements authorize (1) the application by a Member State of
duties, tariff measures, and/or quotas to protect a domestic industry against
an increase in imports that is causing it or threatens to cause it a serious injury
(Agreement on Safeguards); (2) to restore the fair taxation of an imported
product whose export price is lower than its normal value (Agreement on
Anti-Dumping Duties); and (3) to respond to certain subsidies obtained in
the country of production by suppliers of imported products (Agreement on
Subsidies and Countervailing Measures). While the number of antidumping
measures has remained relatively stable over the past few years, the trade ten-
sions that have prevailed since 2018 have, on the other hand, generated a
significant increase in countervailing measures of subsidies and safeguard

6
Least developed countries are low-income countries confronting severe structural impediments to
sustainable development. They are highly vulnerable to economic and environmental shocks and have
low levels of human assets. There are currently 46 countries on the list of least developed countries,
which is reviewed every three years by the Committee for Development. Least developed countries
have exclusive access to certain international support measures in particular in the areas of devel-
opment assistance and trade. Source: United Nations, Department of Economic and Social Affairs.

©International Monetary Fund. Not for Redistribution

14 Customs Matters: Strengthening Customs Administration in a Changing World

measures. The number of countervailing measures in force thus increased

from 154 on June 30, 2017, to 228 on June 30, 2020 (WTO 2017, 2020),
whereas the number of safeguard investigations initiated increased from 11
for 2016 to 25 for the period from October  2019 to October  2020 (WTO
2020). Within this framework, the responsibility of customs is to collect the
duties, prevent and detect their possible circumvention, and make available to
the authorities trade data that may be useful to initiate permitted actions
under the agreements.

The Production of Foreign Trade Statistics

As administrative organizations vary from country to country, customs is not
always responsible for compiling and publishing foreign trade statistics. However,
achieving reliable foreign trade statistics is reliant on customs collecting declara-
tion data that has a good level of accuracy. Customs’ investment in improving
compliance, especially in relation to classification, valuation, and origin of goods,
therefore also benefits the statistical information. Moreover, the WCO Data
Model has helped with global standardization. Because all commercial imports
and exports must be declared to customs, it is a rich source of data to enable
statistics to be compiled for both general and special trade. These statistics are
important for businesses and essential for the national authorities, for governance,
definition of policies, and monitoring and control of key sectors.
In many developing economies, revenues from the extractives industries are a
critical component of public finance, whereas information on these sectors’ activ-
ities and revenue due and collected is often insufficient.7 Customs data from
verified export declarations are one of the most reliable references to both cross-
check the country’s natural resource revenue receipts with actual flows and dis-
close to the public and decision makers accurate  data on extractive companies’
outputs. Unfortunately, customs in developing countries too often do not devote
enough attention to control of exported natural resources.
The Harmonized Commodity Description and Coding System (“Harmonized
System”) developed and administered by the World Customs Organization
(WCO) is the international product nomenclature used for the collection of
international trade statistics.8 It is composed of more than 5,000 commodity
subheadings, each identified by a six-digit code, arranged in a logical and hierar-
chical structure. The legal text of the Harmonized System is composed of these
codes, Notes, and General Interpretative Rules that direct how classification is
undertaken. These legally binding provisions help achieve uniform classification

7
This was a factor for the creation of the Extractive Industries Transparency Initiative. Founded in
2003 and organized as a nonprofit association, the Extractive Industries Transparency Initiative is a
global standard that seeks to address key governance issues in oil, gas, and mineral resources sectors.
As of January 2021, 55 countries were participating.
8
More than 98 percent of the merchandise in international trade is classified in terms of the Har-
monized System (WCO).

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 15

between countries to the six-digit level. Countries may further subdivide below
this level, but such subdivisions are not internationally consistent. It is important
to note that the Harmonized System is a multipurpose nomenclature of com-
modities. In addition to the statistical objective and application of customs duties,
it is also extensively used in many other areas, for example, definition of rules of
origin9 and application of internal taxes and various regulations on imports and
exports.

PROTECTION AND SECURITY

The Application of Standards and Regulations on Imports
and Exports
Whenever domestic legislation is applicable to imported or exported goods, cus-
toms plays a role, either by directly enforcing the law or by ensuring that other
responsible agencies have concluded their review process before releasing these
goods. This may be done through document-based inspection or, as needed,
physical inspection and laboratory tests.
For example, in terms of environmental and health protection, customs mon-
itors the application of the provisions of the relevant international conventions,
especially the Basel Convention on the control of transboundary movements of
hazardous wastes and their disposal, the Rotterdam Convention on the prior
informed consent procedure for certain hazardous chemicals and pesticides in
international trade, and the Stockholm Convention on persistent organic pollut-
ants (together known as the BRS Conventions). For customs with maritime
response capabilities, the action against the spread of waste extends to the fight
against marine pollution. An equally important customs mission for the environ-
ment is the control of ozone-depleting substances, such as chlorofluorocarbons
and other ozone-depleting substances covered by various protocols, the phasing
out of which was enshrined in the 1987 Montreal Protocol. Customs contributes
directly to compliance by checking that trade in these substances has been duly
authorized and reported regularly to the United Nations Environment Program
so that it can ensure that countries meet their ozone-depleting substance phase-
out commitments under the protocol.
The role of customs in protecting the environment could expand considerably
with the implementation of climate change–related initiatives. The administra-
tion could play a pivotal role in carbon taxation if border adjustment mechanisms
are implemented to prevent carbon leakage and support fair competition. In
July 2021, the European Commission made a proposal to establish such a mech-
anism that would target a selection of products imported into the EU. Chapter 2
discusses this topic.

9
Under the provisions of regional trade agreements, the conditions to be met to grant preferential
origin status to a product may include a change in tariff classification after local transformation.

©International Monetary Fund. Not for Redistribution

16 Customs Matters: Strengthening Customs Administration in a Changing World

Customs is involved in the application of the WTO Agreement on Trade-

Related Aspects of Intellectual Property Rights (TRIPS). Counterfeiting of goods
has been widely denounced, even more since it has been extended to products
that threaten human health, such as car parts that do not comply with manufac-
turers’ standards, toys that are dangerous for children, and fake medicines that are
inoperative or toxic. Evidence of the spread of counterfeit goods to all production
sectors and the growth in this illicit industry have increased from $461 billion
USD in 2013 to $509 billion USD in 2016 (that is, from 2.5 percent to 3.3 per-
cent of world trade), thus highlighting the importance of combating this issue
(OECD/EUIPO 2019).
In addition to detecting counterfeit goods, customs has a role in consumer
protection by enforcing compliance with various technical quality standards
(some customs administrations have their own laboratories for this purpose) and
veterinary (animals and animal products) and plant health regulations. Veterinary
and phytosanitary controls are examples of those usually undertaken by technical
agencies at the border. Nevertheless, customs plays an essential role since, when
releasing goods, it must ensure prior to release that these agencies have carried out
their controls and have approved import or export. The so-called “mad cow” crisis
(transmission of bovine spongiform encephalopathy to humans), which occurred
in Europe at the end of the 1990s and caused fatalities and a serious crisis in the
beef sector, bears witness to the importance of the customer protection aspect of
the customs mission.
Dangerous goods, also known as “hazardous materials,” may serve as interme-
diate materials (for example, ethyl alcohol used for sanitizer) or semi-knocked-
down products (for example, lithium batteries used for mobile phones) through
the globalized production and account for a considerable portion of international
trade in goods. Such goods are regularly transported and stored throughout global
supply chains and therefore pose high risks to the security of societies. Customs
takes responsibility for controlling these goods in both regulatory and operational
terms.

The Fight against Illegal Trafficking

Legitimate trade has become a vector for illicit “Illegal trafficking of goods
trade that runs in parallel. The pressure from soci- takes place on a large scale,
ety and the authorities to step up customs action
and customs plays a major
to prevent trafficking in illegal dangerous goods
has increased significantly. It is revealing that role in detecting and sup-
many customs administrations now focus as much pressing these activities.”
or more of their resources and efforts on seizures
of illegal products as on revenue performance. The safety, security, and protection
of the society aspect of customs continue to increase in importance for many
countries. In Chapter 6, suggestions for strengthening customs enforcement are
discussed, and the discussion provides guidance on how administrations can bol-
ster this important function.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 17

Drug trafficking is, more than ever, a major threat to society. According to the
2019 report of the United Nations Office on Drugs and Crime (UNODC 2020),
the number of drug users has increased by 30 percent since 2009, and the most
worrying trends in drug use are related to cocaine, methamphetamine, synthetic
opioids, and heroin. Cocaine production has reached record levels and consump-
tion has become globalized (143 countries in all regions reported cocaine seizures
between 2013 and 2017, compared with 99 countries between 1983 and 1987).
Seizures of these other substances have also increased as shown in Table 1.3, and
customs is at the forefront of the fight against international trafficking in drugs.
UNODC and WCO together launched a Container Control Programme (CCP)
in 2004 that 59 countries have joined so far and that has resulted in establishing
98 port control units and 21 air cargo control units. During 2019, those units
made 800 drug seizures involving 77 tons of cocaine, 1.5 tons of heroin, 850
kilograms (kg) of cannabis, 120 kg of psychotropic substances, and 37 tons of
precursor chemicals.10

TABLE 1.3.

World Drug Seizures of All Services, 2007–17

(Metric tons)
Categories of Drugs 2007 2012 2017
Cocaine 731 701 1,275
Heroin and morphine 92 124 190
Opium 521 557 693
Amphetamines except ecstasy 50 149 247
Ecstasy 19 5 14
Cannabis (resin) 1,318 1,269 1,162
Marijuana 6,118 5,523 5,111
Source: UNODC 2020.

In order to combat drug trafficking effectively, many customs authorities do

more than strengthen their traditional intelligence and control capabilities. They
may have legal powers to conduct covert investigation operations, and in addition
to the actual seizure, they can succeed in dismantling entire networks and seizing
the capital generated by trafficking (anti-money laundering). In a more recent
development, some of these customs authorities have also been given the legal
power to monitor social networks in order to detect purchase orders and deliveries
to individuals.
Another type of illicit trade that customs fights is the illegal trade in endangered
species. Customs participates in protection of biodiversity through the fight against
illegal trafficking of species protected by the Convention on International Trade in
Endangered Species of Wild Fauna and Flora (CITES, also known as the
Washington Convention). In addition to its ongoing work in this area, customs also

10
CCP seizures in 2019 also included 104 containers of counterfeit goods and 705 million packs of
cigarettes as well as toxic waste, weapons, and specimens of protected animal species.

©International Monetary Fund. Not for Redistribution

18 Customs Matters: Strengthening Customs Administration in a Changing World

participates in coordinated interventions with police services organized by Interpol

and the WCO or mobilizes itself to run such activities. An operation of this type
was carried out in June 2019 in 109 countries and showed the magnitude of the
problem. In less than one month, 582 suspects were arrested and more than 1,800
seizures were recorded, including 545 kg of ivory, 1.3 tons of pangolin scales, almost
10,000 live turtles, 30 big cats, 23 primates, more than 1,400 reptiles, more than
4,300 birds, 2,550 cubic meters of wood, and more than 2,500 plants.
Illegal trade flows also notoriously include cultural heritage goods, precious
minerals and gemstones, food products, and goods subject to high excise duties
such as tobacco, alcohol, and fuels, among others. In response to the growing
threat posed by cross-border flows of small arms and light weapons, in 2015 the
WCO started the Small Arms and Light Weapons Project, which aims to detect
and prevent illicit trafficking of these items.11

Customs’ Contribution to National Security and Combatting

Terrorism
Following the attacks against the United States on “ The SAFE Framework pre-
September 11, 2001, a review of border security scribes standards that have
identified trade flows as a significant potential
been tested and perform
vector of international terrorism. Mitigation mea-
sures were taken, a number of which were the well around the world, set-
responsibility of customs administrations, to bet- ting a new approach on
ter secure the supply chain and ports. These working methods for both
included the Container Security Initiative imple- customs and companies
mented by the USA in 2002 and the Import toward a common goal
Control System put in place by the EU 2005.
based on trust.”
Whether by deploying teams of US Customs and
Border Protection officers at the main ports of shipment to the United States (58
ports in 2021) or by requiring the sending to customs of a prior declaration
before boarding to the EU, these measures respond to the same concern: to detect
high-risk consignments as early as possible (at or before the port of departure).
At the June 2005 WCO Council Sessions, WCO members adopted the SAFE
Framework of Standards to Secure and Facilitate Global Trade, regularly updated
since then, which is based on three pillars. The core element of the first pillar—
strengthening of cooperation between customs administrations—is the exchange
of advance information transmitted electronically to identify high-risk cargo and
conveyances prior of their dispatch. The second pillar—strengthening of the
partnership between customs and business—is based on the Authorized
Economic Operator (AEO) status granted to traders who can justify their

11
Since 2015, the number of specialized programs run by the WCO has increased considerably, and
they target the following customs enforcement areas: drugs, environment, revenue, security (including
the Small Arms and Light Weapons Project), cultural heritage, intellectual property rights, health and
safety, and anti-money laundering and counter-terrorism financing.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 19

compliance with regulations and security of their supply chain and internal pro-
cedures.12 The third pillar—strengthening customs cooperation with other gov-
ernment departments responsible for security—aims to avoid duplication of
requirements and controls in the supply chain and to streamline procedures.
Further detail on the AEO program can be found in Chapter 4.
In addition to implementing the SAFE Framework, customs strengthens secu-
rity through specific measures such as the WCO’s Strategic Anti-Fraud Program.
This program aims to combat the trafficking and smuggling of weapons of mass
destruction and related materials and to monitor compliance with restrictions on
the movement of dual-use goods (that is, goods, including software and technol-
ogy, that can be used for both civilian and military purposes).

Participation in the Fight against Cross-Border Crime

and Intelligence Gathering
Customs is involved in the fight against organized crime as an element in its
border controls or search activities within the territory. At the border, many cus-
toms administrations have the mandate and power to arrest the persons involved
in cases of trafficking in human beings, illegal migrant smuggling networks, or
any other criminal activity. At the border and within the territory, customs may
collect information relating to a criminal organization or criminal acts (such as
money laundering) and transmit it to the competent judicial and police services.

TYPICAL CUSTOMS PROCESSES

To execute their mission, customs administrations implement processes that are
similar worldwide. This can be explained by the fact that they have the same
objectives and types of expected results in all countries and by the existence of
international conventions and standards, which have brought a global harmoni-
zation of steps (see the following section). These processes are succinctly described
to facilitate the reading of the following chapters of this book.
Goods arriving in ports or leaving the country are first presented to and
recorded by the customs authorities. They are then cleared through customs,
which means a customs procedure (import for consumption, temporary import,
export, and so on) is requested by the declarant through the filing of a customs
declaration.
Customs then verifies that the declaration is correct to ensure that all relevant
entry or exit obligations are fulfilled and that the correct duties and taxes have
been assessed and paid. This verification may include physical inspection of the

12
This status has been incorporated into numerous customs laws, and mutual recognition agreements
have been concluded between countries strictly applying the eligibility criteria defined by the SAFE
Framework so that AEOs can benefit from reduction of controls and access to simplified procedures
beyond their country.

©International Monetary Fund. Not for Redistribution

20 Customs Matters: Strengthening Customs Administration in a Changing World

goods. The duties and taxes collected depend on the value and/or quantity, the
physical characteristics, and,  for customs duties, in some cases the country of
origin of a specific product. Total or partial exemptions of duties or taxes generally
also depend on the status of the importer (beneficiary of the measure) and the
final use of the exempted good.
Customs may carry out additional verifications after it clears the goods, either
by a desk review of documents furnished or by conducting a more detailed and/
or comprehensive audit at an operator’s premises. The purpose of these checks is
to recover duties and taxes that may have been evaded at the time of declaration
and ensure compliance with import and export regulations.
Monitoring of goods within the customs territory—not at one border crossing
point only—is required for many customs procedures and very common, either
to manage transit cargo circulating between countries or inland customs offices
or because a conditional suspension or exemption of duties has been granted.
Customs transit procedures are essential for landlocked countries, and exemp-
tions are widespread in developing countries.
A mobile customs preventive service is normally present at borders and around
ports to ensure that goods are directed to customs clearance offices, combat smug-
gling and other criminal activities, and participate in border surveillance.
Investigation units are responsible for tackling fraud and trafficking throughout
the entire customs territory, including prosecuting serious offenses.
Customs intelligence and risk management functions select and target inter-
ventions. From a focus on goods, attention of these functions has progressively
extended to the details of the trade transaction, players involved, and supply chain
and logistics. Conjointly, the gathering and use of data have become critical.
Customs administrations also increasingly rely on collaboration with other
stakeholders to  achieve their objectives. This takes the form of a broader and
deeper dialogue with the private sector, exchange of information and coordina-
tion with tax administrations and other government agencies, and international
customs cooperation, particularly for enforcement and trade facilitation
purposes.
Customs control is often more present on the import side than on the export
side, yet customs is equally in charge of export and import. The customs respon-
sibilities described earlier show numerous reasons for checking export goods and
transactions—from witnessing the actual exit of goods from the territory for VAT
and excise management purposes to certifying the country of origin of an export-
ed product, enforcing restrictions on export of civilian and military dual-use
goods and technologies, collecting data to enhance transparency in natural
resource sectors, and seizing prohibited goods, to name a few. Growing coopera-
tion between the authorities of destination and departure countries will increase
requests for administrative assistance, with responses from the departure country
facilitated if effective checks have been carried out on the export. The processes
and functions summarized previously therefore apply to trade flows in both direc-
tions, and insufficient export control, as is sometimes found, would need to be
remedied.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 21

TRENDS IN THE GLOBAL ENVIRONMENT OF

CUSTOMS
The customs environment is constantly evolving, and customs must address the
different components of this evolution. Modernization is the only option to
remain effective. Here we highlight some global trends that have a direct and
significant impact on customs  strategy and operations. Many, if not all, of the
changes underway tend to reinforce the role of customs and the need to have
well-functioning and effective customs administrations.

Changing Patterns of International Trade

International trade is unlikely to grow as fast as it did before 2008, a situation that
some academics have dubbed “slowbalization.” The strong growth before 2008
and subsequent slowdown are not a cyclical economic phenomenon but a struc-
tural change that can be explained first by the slower growth of global value
chains13 and may be accentuated by several other developments. Trade tensions
were started as a political agenda focusing on bilateral trade imbalances and thus
a cause of unemployment. They may remain in the form of increased trade bar-
riers, particularly tariff increases.14 Service sector evolution, such as the sharing
economy and leasing rather than purchasing goods, may contribute to a further
slowdown in the growth of world merchandise trade.
More recently, policies in response to COVID-19, including “secure supply,”
may have added further momentum to slowbalization, if not deglobalization.
Overdependence on foreign production of medical and other essential goods has
created a perception of strategic vulnerability, prompting countries to implement
policies to reduce their reliance on foreign suppliers for these goods. Such policies
have included export restraints, which have exacerbated countries’ vulnerability to
supply disruptions, and measures aimed at diversifying or shortening supply
chains, if not boosting domestic manufacturing. Separate incidents in early
2021—shortage of semiconductors, for which production is highly concentrated,
and the temporary blockage of the Suez Canal—have further warned of current
supply chain disruption risks, which had previously been highlighted by the Great

13
See historical data in World Economic Outlook report (International Monetary Fund 2019). For a
discussion of trade and value chains, see in particular McKinsey Global Institute (2019).
14
During the period from October 16, 2018, to October 15, 2019, these tensions were reflected in
the implementation by WTO members of 102 new restrictive import measures with an estimated
trade coverage of nearly $750 billion, the highest amount since October 2012 and an increase of
27 percent compared to the previous annual period. At the same time, however, WTO members have
also implemented 120 new trade facilitation measures with an estimated trade coverage of nearly $545
billion. Interestingly, only 89 new trade-restrictive and 88 trade-facilitating measures were introduced
in the following 12-month period, that is, the lowest figures since 2012 (WTO 2020). This may be
explained by the global health emergency that had almost inevitably resulted in governments focusing
less on designing and implementing regular trade policies and more on dealing with the immediate
economic issues in the context of the pandemic.

©International Monetary Fund. Not for Redistribution

22 Customs Matters: Strengthening Customs Administration in a Changing World

East Japan Earthquake in 2011. Companies may attempt to secure their activity
by diversifying and introducing more flexibility in their sources of supply and
may avoid using value chains that are too complex or geographically dispersed.
Although a spontaneous rapid shift in supply chains is not in sight, companies
have started reorienting their supply chains from just-in-time to just-in-case
inventory management in order to reduce the risk of supply disruption. The
potential effect of this restructuring and diversification on customs tasks is not
clear. Pressure might be relieved from customs administrations for reaching very
short clearance times, but complexity of applicable rules and workload might
increase with protectionist initiatives and the number of bilateral trade agree-
ments. Slowbalization will have implications for customs’ revenue collection,
regardless of the types of duties and taxes levied. In addition, the increasing fre-
quency of combining both physical and digital elements in a single sale (for
example, a physical good with a digital subscription service) will increase the
number of complex cases for the calculation of customs value. Insofar as these
taxes are based on the import value, customs should be aware that revenue collec-
tion may not increase as fast as previously.
Nevertheless, there is a convergence of views that international trade will play
an important part in the implementation of the major structural economic reforms
needed globally following the recovery from the COVID-19 pandemic disrup-
tions. At the March 23, 2021 high-level seminar WTO Aid-for-Trade Stocktaking
Event, the IMF managing director emphasized the following issues: “Trade will be
at the heart of efforts to build forward toward a greener, more inclusive and digital
recovery. We are going to experience structural shifts to the new climate economy.
It will depend on the exchange of goods and services.” In this context, maximum
efforts should be made to avoid administrative bottlenecks or a blockage anywhere.
The agenda for customs will include streamlining, digitalizing, and guaranteeing
predictability of their own procedures and, likely, asserting a leading role in an
efficiently coordinated border management. Customs and other agencies are
already increasingly ensuring coordinated risk management and inspection of
goods at borders (for example, Dutch State Inspection terminal at Rotterdam port
and similar structures at Schiphol airport), performing specific inspections on
behalf of others, or merging administrative structures to improve efficiency (for
example, customs and border sanitary inspections in China).
Rapid growth of e-commerce, including
business-to-consumer, is an evolution that poses “A major challenge for cus-
specific problems to customs administrations. toms is to continuously
According to the WTO, the value of world e- adjust to the evolving pat-
commerce markets increased from $19.3 trillion terns and modalities of
in 2012 to $27.7 trillion in 2016 (86.3 percent of international trade and
this amount was transactions between companies),
commerce.”
that is, an increase of 43.5 percent in four years.15

15
In accordance with the commonly accepted definition, electronic commerce as defined here is that of
goods and services ordered by digital means and delivered either physically or digitally.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 23

Physical delivery of a multitude of small parcels of low value mobilizes significant

customs resources for two reasons: (1) existing thresholds (de minimis value) for
the application of duty and VAT tend to be lowered or removed to mitigate rev-
enue and the competition impact of large volumes of exempt imports and (2) the
transborder fraud that has developed through online orders, particularly for ciga-
rettes, drugs, counterfeit goods, weapons, and false documents. To be effective,
the fight against such trafficking cannot be limited to  traditional methods of
control. Customs administrations have set up services to collect, enrich, and
exploit information to effectively combat internet fraud (for example, French
customs’ Cyberdouane unit).
On digital deliveries, in 1998, as global electronic commerce created new
opportunities for trade, members of the WTO decided, in line with the practice
of the time, not to impose customs duties on electronic transmissions (WTO
1998). While this moratorium has since been renewed, customs faces a different
type of challenge with the possible transfer of the production of physical goods to
any part of the world through electronic transmission of appropriate software.16
The WTO (supported by the G20 with the June  2019 launch of the “Osaka
Track” initiative on the digital economy) has  reinvigorated work on the scope,
definition, and impact of the 1998 moratorium. Whatever the conclusions of this
work, three-dimensional (3D) printing represents one of the most disruptive
digital technologies for customs administrations since it changes the notions of
borders and trade flows. To overcome the lack of global standards and guidelines
for the growing trade in cross-border electronic commerce in physical goods, the
WCO released the Cross-Border E-Commerce Framework of Standards in
June 2018. E-commerce is discussed further in Chapter 2.

A Global Normative Framework but National and Regional

Priorities
Compared to other institutions, customs has the advantage of having global stan-
dards and rules defined collectively within international organizations and, in
particular, by the WTO and the WCO, whose functions and main contributions
are presented in Box 1.1. Without this international frame, world trade could
certainly not have developed in the same way. These rules have formalized the
obligations and actions of customs and have simplified and harmonized customs
procedures and practices. However, customs may derogate from them when the
implementation of either national or regional directives so requires. (In a customs
union, a national customs authority must follow the common rules). This is par-
ticularly the case when authorities decide to exempt themselves from these rules
in the name of protecting their economic or fiscal interests. Recent examples

16
3D printing refers to a manufacturing process whereby a product is assembled by layering materials
in accordance with programmed commands. By contrast, manufacturing traditionally involves taking
lots of parts and screwing or welding them together. According to Mordor Intelligence (2021), the 3D
printing market was valued at $13.7 billion in 2020 and is expected to reach a value of $63.46 billion
by 2026.

©International Monetary Fund. Not for Redistribution

24 Customs Matters: Strengthening Customs Administration in a Changing World

Box 1.1. The World Trade Organization and the World Customs
Organization
The World Trade Organization (WTO) provides the framework for negotiating trade agree-
ments, reviewing trade policies, and settling trade disputes between members. WTO mem-
bers (164 as of 2021) commit themselves to rules of good conduct in trade policy, including
“bound” tariff rates that can only be exceeded in emergencies (although countries have the
option of imposing a general increase in their tariff schedules when faced with a balance
of payments crisis, with the IMF intervening to certify that the situation does indeed require
it). The WTO’s Agreement on Customs Valuation on the basis of the transaction value of
imports, which prohibits overvaluation by customs for tariff reasons; the Agreement on
Rules of Origin, which aims at harmonization of nonpreferential rules of origin; and the
WTO Trade Facilitation Agreement (TFA), which came into force in February 2017, are three
examples.
The World Customs Organizations (WCO) is a global organization of customs from 183
countries, as of 2021, involved in the management of more than 98 percent of world trade.
Its mission is to improve customs efficiency to which it has contributed by developing
standards for harmonized and simplified procedures—in particular with the Harmonized
Commodity Description and Coding System and the revised Kyoto Convention on the
simplification and harmonization of customs procedures—and by promoting the exchange
of experience and the dissemination of good practice in these areas. The WCO is also
responsible for the SAFE Framework of Standards and the Framework of Standards on
Cross-Border E-Commerce.
It is important to stress that these institutions act in a coordinated manner. For
example, the WCO supported the negotiations on and implementation of the WTO TFA and
developed a program called Mercator to assist its members in implementing the facilita-
tions provided for in the agreement. The Technical Committees on Rules of Origin and
Customs Valuation function under the auspices of the WCO, the latter with a view to ensur-
ing, at the technical level, uniformity in interpretation and application of the WTO Valuation
Agreement.

Source: Keen (2003) and authors.

Note: TFA = Trade Facilitation Agreement; WCO = World Customs Organization;
WTO = World Trade Organization.

include the unilateral measures taken by the United States and China since 2018
in the context of trade tensions between them; the closure by Nigeria in 2019–20
of its land borders with neighboring countries, including other ECOWAS mem-
bers; and the United States’ new tariffs (suspended in January 2021) to retaliate
against France introducing a digital services tax. In view of recent geopolitical
developments, marked by increased competition and a more aggressive stance
among powers, and significant challenges posed to unilateralism, a return to a
more protectionist world cannot be ruled out. At the same time, international
trade will remain a source of growth, although probably to a lesser extent than
before 2008, and is essential to prosperity. There is, as a result, a growing consensus
that a reform of the WTO would be necessary to reinvigorate its functions, help
calm tensions, and tackle major current global issues impacting trade, although the
contours of such a reform remain to be defined. Customs administrations once
again will have to adapt to the global, regional, and national contexts.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 25

In respect to national legislations applicable to imported and exported goods,

increased requirements and checks at borders for market access have been
observed over recent years, particularly in advanced economies. To mitigate the
need for increased border controls by customs and other agencies, developing
international standards and mutual recognition of compliance controls is critical.
It will be all the more necessary that requirements are no longer limited to the
features of the products. They extend to production and distribution and to meet
environmental and social expectations, such as extraction or manufacturing of
goods not involving forced or indentured labor, and more similar requirements are
likely to emerge from ongoing discussions for promotion of green economies.

Digitalization
The information systems that equip almost all customs administrations today
make it possible to computerize and automate, and thus secure, the entire cus-
toms clearance procedure.17 Customs in developing economies are not exploiting
this advantage fully. To the detriment of the traceability of operations, simplifica-
tion, and revenue protection, their use of existing information and communica-
tion technologies is not optimal, and more important, procedures have not yet
been updated, automated, and converted to electronic format. Declarations and
commercial documentation in paper are still presented to customs officers.
Adopting e-documents and automation is therefore a huge project that is critical
for customs’ future success. The need for social distancing caused by the
COVID-19 pandemic starting in 2020 significantly improved the awareness
among customs managers and traders that electronic systems and processes could
be extremely useful and their implementation should be completed everywhere as
soon as possible.
To enhance performance, customs should further integrate its information
system with its partners, and this will be facilitated by the adoption of electronic
documents. Interconnecting customs systems with neighboring countries enables
a better monitoring of transit cargo moving under customs controls from one
country to another. It also facilitates export and import data cross-checking for
verification purposes. A more ambitious and longer-term objective for a national
customs administration is to use digital technologies to monitor the supply chain
beyond the customs territory from departure from the export country to arrival,
and vice versa. This process is already underway within the customs territory, but
by extending it abroad, customs will move from transactional management of
border-crossing operations to the monitoring of entire trade flows. Blockchain
technology, in particular, may find a suitable application here. See Chapter 7 for
more details on digitalization.

17
Customs were among the first public administrations to introduce computerization as far back as
the 1970s.

©International Monetary Fund. Not for Redistribution

26 Customs Matters: Strengthening Customs Administration in a Changing World

Data
A customs declaration contains several dozen types of data relating to the trans-
action, the goods, the persons involved, the means and modes of transport, and
the customs treatment it has received. All this data is archived in the customs
information system, which creates a considerable repository of information at the
disposal of customs administrations. Many entities are faced with scarcity of data
while having the tools to exploit them. Customs is usually in the opposite situa-
tion: it is sitting on a mass of data that it often has not sufficiently analyzed nor
matched on a large scale with external data sources to identify patterns and pos-
sible anomalies. Systematically using data for strategic and operational purposes
(control and enforcement, trade facilitation, staff performance, integrity monitor-
ing, and so on) is definitely one of the critical projects for customs administra-
tions in the coming years. This is further discussed in the following chapters.
Data sharing and matching between customs and other stakeholders is a key
element of the data agenda. With regard to revenue collection, customs and tax
administrations must share data to assess compliance risks effectively. Particularly
in developing countries and even more so in fragile and conflict-affected states
(FCS), this exchange of information is not optimal, although a simple cross-
checking would be enough to reveal significant anomalies between tax and cus-
toms declarations by the same taxpayer and possible noncompliance or fraud on
either or both sides. Cooperation of customs with tax is discussed particularly in
Chapters 3 and 6. Another powerful tool with significant benefits for customs is
mirror data analysis, that is, the reconciliation of export data from the world to
the country with import data recorded by the country’s customs administration,
particularly when conducted at the finest possible level of detail (as indicated
in Chapter 2).18

Customs in Fragile and Conflict-Affected States

The importance and range of responsibilities assigned to customs make it a key
institution in any country. However, this position is most pronounced in FCS,
where the continuity of the state ultimately rests on a small number of institu-
tions. Customs is also one of the most visible administrations, both inside and
outside the country, and so it must be an example of a technical and ethical
organization capable of leading the way in improving governance and, in numer-
ous cases, maintaining or restoring the rule of law. Moreover, there is no indica-
tion that global illegal trade and associated criminal activity is decreasing or even
being contained. On the contrary, entire regions are being destabilized, further
facilitating illegal activities and raising the stakes for effective customs control in
collaboration with other law enforcement agencies. The FCS issue is becoming
increasingly important given the depth of challenges they face and exacerbated by

18
The IMF’s Fiscal Affairs Department has emphasized and prioritized tax and customs data match-
ing and mirror data analysis under capacity development programs. On the latter, see in particular
Geourjon, Anne-Marie, Bertrand Laporte, and Gilles Montagnat-Rentier. 2022.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 27

the impact of COVID-19 on this group of countries.19 Following the World

Bank’s classification criteria with some minor differences, the IMF Staff have
maintained a list of FCS, which, as of 2021, includes 42 countries, affected to
various degrees by lack of state legitimacy, limited administrative capacity, chronic
humanitarian crises, persistent social tensions, and either ongoing violence or a
significant legacy from armed conflict and civil war. The IMF is granting a special
attention to those countries by adjusting its policies, support, and advice
(International Monetary Fund, 2015, 2017). The approach to customs adminis-
tration consists of setting up basic administrative procedures in the post-conflict
or crisis context and a prioritization of tailored reform initiatives during the
consolidation phase. See suggested orientations in Box 1.2.

Box 1.2. Customs Administration in Fragile

and Conflict-Affected States
The following initiatives may be considered to guide the strengthening of customs admin-
istration in fragile and conflict-affected states.
• Adapt tax, tariff, and customs policies with which customs faces serious implementa-
tion challenges.
• Deviate from international administrative standards as necessary.
• Under the trade facilitation agenda, prioritize application of the rule of law.
• Focus on the few major ports and core functions with large revenue potential.
• Recognize that geography and the economy may dictate certain priorities (for
example, customs transit for landlocked countries, monitoring of natural resource
export).
• Implement a basic compliance improvement strategy.
• Maximize the use of technology to remove human intervention.
• Implement human resource management reforms limited to those essential to
improved performance and integrity.
• Create specialist national functions and staff to assist field offices.
• Establish (at least) the minimum required infrastructure to be able to operate.
• Ensure that services from private providers (if any) and border interventions by other
state agencies do not impede customs administration operations and reforms.

Source: Authors.

THE ROLE AND SUPPORT OF INTERNATIONAL

INSTITUTIONS
The fundamental role of the institutions responsible for defining the standards
that enable the development of international trade under the best possible condi-
tions has already been stressed. Other institutions also support the development
of international trade through capacity development programs benefiting request-
ing countries and their customs administrations. This is the case of the IMF. One
of its objectives as set out in its Articles of Agreement is to facilitate the expansion

19
For an identification of the causes and consequences of fragility as well as an understanding of the
consequences of fragility for the formulation and implementation of macroeconomic policy in fragile
states, see Ralph Chami, Raphael Espinoza, and Peter  J.  Montiel (Eds.), Macroeconomic Policy in
Fragile States. Oxford, UK: Oxford University Press, 2021.

©International Monetary Fund. Not for Redistribution

28 Customs Matters: Strengthening Customs Administration in a Changing World

and harmonious growth of international trade, and Article V-2(b) specifically

allows the IMF to deliver technical assistance to its members upon their request.
To  achieve this goal, the IMF encourages and assists members to embrace
trade liberalization. At  the same time, it helps country authorities resolve the
political and economic problems, revenue risks, and administrative issues
involved in this approach. This is reflected in the IMF’s three main areas of work.
As part of its general surveillance of member countries’ economic policies, the
IMF generally provides for an assessment of trade and customs policies when
required. In its lending to member countries, whether in the context of a program
prompted by an immediate crisis or by long-term development and crisis preven-
tion considerations, trade and customs policy reform is often a key component,
and lending is often conditional on reforms in these areas. As part of its support
for capacity development—which may or may not be linked to a program—the
IMF has significantly increased its action by establishing, starting in the early
2000s, a global network of regional capacity development centers (RCDCs) and
training programs and by increasing the use of external funding to support cus-
toms reforms.20
These initiatives have considerably increased the number of capacity develop-
ment activities in the past 20 years, especially to the benefit of fragile and low-
income countries, many of which are in sub-Saharan Africa. Table 1.4 provides an
overview of the evolution of the number of capacity development activities under-
taken annually by the IMF Fiscal Affairs Department (FAD) to address customs
administration reform and modernization (from a total of 30 strategy-setting,

TABLE 1.4.

IMF Fiscal Affairs Department’s Capacity Development Missions in Customs

Administration, 2000/2019
Missions 2000 Missions 2019
Total 30 Total 60
Including: Including:
Sub-Saharan Africa 10 Sub-Saharan Africa 25
Asia and the Pacific 4 Asia and the Pacific 26
Europe, Middle East, and 10 Europe, Middle East, and 0
Central Asia Central Asia
Western Hemisphere 6 Western Hemisphere 9
Source: IMF staff calculations.
Note: Missions undertaken from IMF headquarters only. Regional capacity development centers’ activities not included here.

20
The global network of RCDCs and training programs is currently made up of the Africa Training
Institute (ATI), the AFRITAC Central (AFC), the AFRITAC East (AFE), the AFRITAC South (AFS),
the AFRITAC West (AFW), the AFRITAC West 2 (AFW2), the IMF Capacity Development Office
in Thailand (CDOT), the Caribbean regional technical assistance center (RTAC) (CARTAC), the
Caucuses, Central Asia, and Mongolia RTAC (CCAMTAC), the Central America, Panama, Domin-
ican Republic RTAC (CAPTAC-DR), the China-IMF Capacity Development Center (CICDC),
the Joint Vienna Institute (JVI), the Middle East Center for Economics and Finance (CEF), the
Middle East and North Africa RTAC (METAC), the Pacific Financial RTAC (PFTAC), the South
Asia RCDC (SARTTAC), and the Singapore Training Institute (STI).

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 29

follow-up, or expert missions in 2000 to 60 such missions in 2019). These were

complemented by more than 150 technical, often hands-on, interventions by
RCDCs in 2019.21 The analysis and conclusions presented in this book are based
on FAD’s extensive experience in supporting customs capacity building.
Besides the IMF, many international institutions provide support for customs
modernization. The World Bank also attaches great importance to this activity
and has been particularly active in supporting large-scale reform programs. The
WCO delivers training and technical assistance programs, for example, on the
Harmonized System, goods valuation rules, or the implementation of the provi-
sions of its Revised Kyoto Convention and the WTO TFA (Mercator Programme).
Substantial technical assistance is also provided by regional organizations and
bilaterally. Since the early 2000s, there has been a  renewed interest in customs
capacity development as part of the broader effort to strengthen the participation
of the developing countries with the lowest incomes in world trade. The
Ministerial Declaration issued at the end of the WTO meeting held in Doha in
November 2001 called, inter alia, for a substantial increase in the resources devot-
ed to these activities.22 Carrying out and coordinating this task has become more
difficult and more urgent than ever and falls under the Integrated Framework for
Trade-Related Technical Assistance. It is an interagency effort that brings together
the work of the World Bank, the International Trade Centre (ITC), UNCTAD,
IMF, WTO, WCO, and the United Nations Development Programme (UNDP),
with the support of bilateral donors, to increase the efficiency and effectiveness of
capacity development in developing and least developed countries on trade-
related issues. IMF staff, at both the headquarters and RCDC level, invest con-
siderable time and effort to coordinate capacity development activities with other
development partners, particularly in the recipient country.

SUMMARY
The emergence of a globalized economy would not have been possible without
the development of customs procedures, sometimes complex to administer, which
have enabled companies to take full advantage of trade policies and incentives,
and without customs’ standardized commodity nomenclature and its foreign
trade statistics, authorities and businesses would have missed critical information
for decision-making. Customs is a more multidisciplinary administration than
most and is the key actor against all forms of illegal trade flows. It is therefore
involved in the response to numerous threats, as diverse as sale of counterfeit and

21
As an illustration, in 2019, RCDC support to customs capacity development represented 16742
work hours for sub-Saharan Africa and 7203 CD work hours for Latin America and the Caribbean.
22
According to a joint report by the WTO and the OECD, the volume of trade-related technical
assistance and capacity building to help developing and least developed countries participate more
effectively in international trade had, by the end of 2005, increased by 50 percent since the Doha
Ministerial Declaration (WTO 2005).

©International Monetary Fund. Not for Redistribution

30 Customs Matters: Strengthening Customs Administration in a Changing World

dangerous goods, damage to  the environment and biodiversity, trafficking in

narcotics, and, more broadly, organized crime and terrorism.
Customs’ methods have evolved in the same way as its mission. For the pro-
cessing of legal trade flows, the time has come for maximal trade facilitation and
partnership with reliable companies that make it possible to free up the necessary
resources for targeted control and enforcement. The technologically most
advanced customs administrations have already switched to massive use of data,
which feed automated risk management systems23 and support the strengthening
of core customs processes. This is the path that all customs will have to follow.
Latent trade tensions and from 2020 the impact of the COVID-19 pandemic
on the global supply chain cloud the vision of the near-term development of
international trade. New technologies and the growth of electronic commerce
bring uncertainty to future trade modalities. Geopolitical tensions, regional insta-
bility, state fragility, and criminal activities are still considerable problems.
However, the long-term trend for international trade remains upward—especially
as flows of goods and services will be essential to recovering from the COVID-19
pandemic and investing in the future, namely building toward greener, smarter,
and more inclusive economies. Customs, which remains highly relevant in this
momentum, will undoubtedly have to be even more flexible and responsive than
it may have been in the past.

REFERENCES
Geourjon, Anne-Marie, Bertrand Laporte, and Gilles Montagnat-Rentier. 2022. “The Use of
Mirror Data by Customs Administrations: From Principles to Practice, IMF Technical Notes
and Manuals, International Monetary Fund, Washington, DC.
IMF.  2021. Macroeconomic Developments and Prospects in Low-Income Countries. IMF Policy
Paper No. 2021/020, Washington, DC.
International Monetary Fund (IMF). 2015. “IMF Engagement with Countries in Post-Conflict
and Fragile Situations—Stocktaking.” IMF Policy Paper, Washington, DC.
International Monetary Fund (IMF). 2017. “Building Fiscal Capacities in Fragile States.” IMF
Board Paper, Washington, DC.
International Monetary Fund (IMF). 2019. World Economic Outlook. Washington, DC: IMF.
Keen, Michael. 2003. Changing Customs: Challenges and Strategies for the Reform of Customs
Administration, edited by Michael Keen. Washington, DC: International Monetary Fund.
Keen, Michael. 2021. “The Keynote Presentation.” IMF/RMTF Webinar Series on
the VAT. IMF, Washington, DC. https://www.imf.org/en/Videos/view?vid=6198818506001.
McKinsey Global Institute. 2019. “Globalization in Transition: The Future of Trade and Value
Chains.” McKinsey & Company.
Mordor Intelligence. 2021. “3D Printing Market—Growth, Trends, COVID-19 Impact, and Fore-
casts (2022–2027).” https://www.mordorintelligence.com/industry-reports/3d-printing-market.
Okazaki, Yotaro. 2017. “Implications of Big Data for Customs—How It Can Support Risk
Management Capabilities.” WCO Research Paper 39, World Customs Organization,
Brussels, Belgium.

23
See, for example, Okazaki (2017) for information on big data initiatives shared by five customs
administrations: Canada Border Services Agency; Customs and Excise Department, Hong Kong,
China; New Zealand Customs Service; Her Majesty’s Revenue and Customs, the United Kingdom;
and US Customs and Border Protection.

©International Monetary Fund. Not for Redistribution

Chapter 1 The Multifaceted Role of Customs and Its Importance for the Economy and Society 31

Omi, Kenji. 2019. “Extraterritoriality of Free Zones: The Necessity for Enhanced Customs
Involvement.” WCO Research Paper 47, World Customs Organization, Brussels, Belgium.
Organisation for Economic Co-operation and Development/European Union Intellectual
Property Office (OECD/EUIPO).  2019. Trends in Trade in Counterfeit and Pirated Goods,
Illicit Trade, Éditions OCDE, Paris, 2019. https://doi.org/10.1787/g2g9f533-en.
United Nations Conference on Trade and Development (UNCTAD). 2019. World Investment
Report. UNCTAD, Geneva, Switzerland.
United Nations Conference on Trade and Development (UNCTAD). 2021a. Data Center.
Volume Growth Rates of Merchandise Exports and Imports, Quarterly. http://unctadstat
.unctad.org/wds/TableViewer/tableView.aspx?ReportId=99&IF_Language=eng.
United Nations Conference on Trade and Development (UNCTAD). 2021b. Global Trade
Update. UNCTAD, Geneva, Switzerland.
United Nations Office on Drugs and Crime (UNODC). 2020. World Drug Report 2019.
https://wdr.unodc.org/wdr2019/en/index.html.
World Trade Organization (WTO). 1998. Declaration on Global Electronic Commerce adopt-
ed on 20 May 1998 by the WTO Ministerial Conference.
World Trade Organization (WTO). 2005. Aid for trade capacity in poorer countries up by 50
per cent since Doha. WTO Press Release 447 (December 12, 2005).
World Trade Organization (WTO). 2017. Report (2017) of the Committee on Subsidies and Coun-
tervailing Measures (adopted 24 October 2017), G/L/1195 Ÿ G/SCM/150. November 3, 2017.
World Trade Organization (WTO). 2020a. Overview of Developments in the International
Trading Environment  – Annual Report by the Director General (mid-October  2019 to mid-
October 2020). November 30, 2020. WTO, Geneva, Switzerland.
World Trade Organization (WTO). 2020b. Report (2020) of the Committee on Subsidies and
Countervailing Measures. WTO, Geneva, Switzerland.
World Trade Organization (WTO). 2020c. “Trade Shows Signs of Rebound from COVID-19,
Recovery Still Uncertain.” WTO Press Release 862, October 6. https://www.wto.org/english
/news_e/pres20_e/pr862_e.htm.
World Trade Organization (WTO). 2021a. “Aid-for-Trade Stocktaking Event 2021.” Statement
by Ms.  Kristalina Georgieva, March  23. https://www.wto.org/english/tratop_e/devel_e
/a4t_e/gr21_e/gr21_e.htm.
World Trade Organization (WTO). 2021b. “Global Trade Rebound Beats Expectations But
Marked by Regional Divergences.” WTO Press Release 889, October  4. https://www.wto
.org/english/news_e/pres21_e/pr889_e.htm.
World Trade Organization (WTO). 2021c. “Tariff Average.” Applied Duties and Trade (IDB),
Tariff Analysis Online. http://tao.wto.org/default.aspx.
World Trade Organization (WTO). 2022. Regional Trade Agreement (RTA) Database. http://
rtais.wto.org/UI/PublicAllRTAList.aspx

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

 CHAPTER 2

How Trade and Tax Policies

Are Shaping Customs
Tadatsugu Matsudaira and Michael Daly

Customs is among the oldest professions in the world and often one of the most
powerful government agencies with the characteristics of a tax authority, police,
trade regulator, and transport regulator. The previous chapter discussed how cus-
toms needs to adapt to assume increasing roles in some areas while retaining its
core roles, notably revenue collection. This chapter focuses on the changing
global environment concerning trade and transport as well as evolving policies
and practices regarding taxation, trade, investment, and customs valuation, all
affecting customs revenue collection.

GLOBAL ENVIRONMENT CONCERNING TRADE

AND TRANSPORT
The previous chapter discussed “slowbalization” “Customs’ contribution to
of international trade, which has implications for revenue will continue, but
customs’ revenue collection regardless of the customs’ tax base growth
types of duties and taxes levied. Insofar as these
may slow, and its share of
taxes are based on the import value, customs
administrations should be aware that revenue GDP may decline if no
collection may not increase as fast as it did previ- other new tax is collected
ously (unless a new tax on imports is adopted, by customs.”
such as the carbon border tax discussed later in
this chapter). Indeed, the percentage of revenue collected by a customs admin-
istration to GDP in the longer term may decline for as long as import growth
is slower than GDP growth, and the speed of decline would be accelerated as
the capacity of domestic tax administration increases and the compliance of
domestic taxpayers improves.

Transport Patterns: More Clearance Away from the Borders1

International transport business has evolved significantly in terms of concentration
and hub-and-spoke. This sector is typically characterized by economies of scale: larger

1
This subsection focuses on maritime cargo rather than cargoes transported by airplanes, railways, or roads.

33

©International Monetary Fund. Not for Redistribution

34 Customs Matters: Strengthening Customs Administration in a Changing World

companies tend to have greater bargaining power and capacity to mobilize bigger
ships and collect larger volumes of cargoes, they can afford to invest in back-office
capacity and ICT, and they are able to provide multimodal transportation and
pertinent services. In recent years, the international seaborne container carrier
business has become increasingly concentrated. The top 10 operators’ share is
more than 80 percent of the world’s total capacity (Jensen 2019). These operators
can reduce their freight costs significantly by investing, for example, by mobilizing
bigger ships, including the “Panamax class,” whose size is such that they cannot
pass through the Panama Canal. Since few ports in the world can accommodate
Panamax-size ships, the transport pattern has changed from point-to-point to hub-
and-spoke, whereby larger ships/larger companies connect between regional hubs
and smaller ships/smaller companies connect between the regional hub and the
final destination. From the global perspective, hub-and-spoke is less costly than
point-to-point, not just because of scale economies and room for investment in
terms of size of ships and companies but also because the point-to-point may face
greater risks of empty one-way traffic, operate less frequently, and face less compe-
tition.2 Containers are rentals from the seaborne transporters that would charge
extra for a late return. Therefore, an empty container has to be returned to these
companies in one of the regional hubs or their regional logistics center.
Transshipment at the regional hub has become a regular business practice.3
Many regional hubs provide special economic zones (SEZs) for certain value-
adding operations on cargoes (for example, cleaning, packaging, labeling, and
processing). Transshipment and processing at regional hubs, particularly if it is a
free zone, may impair cargo traceability. As hub-to-hub shipments are handled by
large and modern companies, data compilation and data exchange are feasible.
However, feeder transporters are smaller, often protected by national regulations,
and often lacking investment in ICT and business process reengineering; the
customs administration may have difficulty obtaining the manifest, cargo, and
consignment data electronically and on time.
Seaborne transport ships are getting larger, and the carriers are becoming more
sensitive to the costs, the largest cost element coming from the ship dwell time at
the port. The shorter the ship dwell time, the more
profit the transporter can earn; the same applies to “Through inland clearing
the port authority, in that the shorter the ship dwell depots, more imports may
time, the more ships can come and the more prof-
be cleared away from the
it  it gains. Within the ship dwell time, the larg-
est  component is the cargo charging/discharg- borders, increasing the
ing  time, in which, among other attributes (for need of customs transit
example, logistics professionalism and customs management.”

2
The same situation also applies to the transportation between the regional hub and the final
destination.
3
For example, Busan (South Korea), Colombo (Sri Lanka), Djibouti, Dubai (United Arab Emirates),
Durban (South Africa), Hong Kong, Lomé (Togo), Long Beach (United States) Panama, Rotterdam
(The Netherlands), Shanghai (China), Tanger (Morocco), Tema (Ghana), and Singapore.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 35

performance), congestion in and around the port is significant. Because many ports
are located in urban areas, it is extremely difficult to enlarge the port site; therefore,
more countries have developed inland clearing depots, moving customs clearance
away from the port. Certain countries adopt a mixed approach: full-load-container
(FCL: the same shipper-seller’s goods in a container, handled by seaborne transport-
er) can be cleared in the port, while less-than-full-container (LCL: several different
shippers-sellers’ goods are in a container, handled by the cargo forwarder) must be
transferred to the inland clearing depot where the goods will be declared and
cleared. A similar trend is observed in landlocked countries that are creating dry
ports away from the land border and closer to large cities. Transportation between
the port/border post and the inland clearing depot is usually treated as bonded
transit transportation, which incurs a transit diversion risk. There are several miti-
gation measures for this risk (for example, transit bond/guarantee, start/destination
comparison, itinerary control, cargo tracking devices, customs seal, customs escort,
convoy, and so on). In some countries, rail transportation and/or specially autho-
rized road transport operators exclusively handle such transportation, which may
reduce the transit diversion risk, thus requiring less customs control.

Trade Patterns: Increased Challenges for Customs

Administration
Intra-Firm Trade and Related Parties
More than half of world trade is thought to involve intra-firm trade.4 Intra-firm
trade occurs through global value chains (GVCs)—long and complicated world-
wide networks for the production of goods and services, whereby intermediate
goods cross at least one border, and typically many
“
borders, in pursuit of efficiency gains before final Customs administrations
assembly. The most recent figures available show should be attentive to not
that GVCs covered 70 percent of world trade, as only unit value but also the
services, raw materials, parts, and components seller–buyer relationship
cross borders before being incorporated into final in customs valuation.”
goods that are shipped to consumers all over the
world.5 Multilateral enterprises have deliberately diverted sources of materials and
parts and allocated several functions and production lines, even for the same
product model, in different countries. This decision is the result of lessons learned
from the increased incidence of international supply chain disruptions, notably
natural disasters, but also other country risks. Assembled products are transferred
to distribution centers and final sales points, all of which could be under the same
corporate group. Such trade may not be in the form of a usual international sales
transaction when there is no seller and buyer—goods may be simply transported

4
See, for example, WTO (2019a). Also, OECD (2013) indicates that among OECD countries,
GVCs are such that more than half of trade involves intermediate inputs.
5
See “Trade Policy Implications of Global Value Chains,” February 2020: https://www.oecd.org/trade
/topics/global-value-chains-and-trade/.

©International Monetary Fund. Not for Redistribution

36 Customs Matters: Strengthening Customs Administration in a Changing World

from one place to the other place coincidentally in a foreign country—thereby

making customs valuation difficult. Profit shifting through transfer pricing may
occur during this business transaction, and corporate income tax could be severely
affected.
Similarly, international supermarket chains transfer thousands of items cross-
border from one distribution center in a country to a distribution center in a dif-
ferent country. A truck can carry thousands of different items with different origins
without original invoices. For this, customs clearance is so complicated that it may
need innovative procedures, such as clearance based on audit or periodic delecta-
tions granted to an authorized economic operator (AEO) in certain countries.6
A traditional customs clearance procedure requests supporting documents,
notably packing list, invoice, and manifest (summary of bill of lading [B/L]). The
B/L is regarded as important as it is the document of title to the cargo issued by a
third party (maritime transporter) and checked by another third party (commer-
cial bank) through the trade financing based on letter of credit (LC) (see Box 2.1).
Trade financing using LC functions only when the country’s banking sector is
internationally accepted. Certain countries’ banking sectors—for example, those
in fragile and conflict-affected states (FCS)—are very weak and not recognized
internationally; thus, the traders of such countries cannot benefit from this trade
financing method. The document called B/L may be issued, but it no longer
represents the title document of the goods; it is just a transport service contract.
Such traders have to take the risk of using the importer’s agent in the exporting
country or the exporter’s agent in the importing country. When using the import-
er’s agent in the exporting country, the buyer’s agent is the exporter and the buyer
is the importer; when using the exporter’s agent in the importing country, the
seller is the exporter and the seller’s agent is the importer. In these cases, interna-
tional trade between two such parties may not be a normal sales transaction; the
invoice and B/L between the importer and exporter may not contain the actual
trade transaction value. The actual trade transaction value would be either the one
the buyer’s agent bought in the exporting country from the seller or the one the
seller’s agent sells in the importing country to the buyer (after the clearance/
release). Customs administrations should be attentive to not only unit value but
also the seller–buyer relationship in customs valuation.

Small/Expedited Shipments: E-commerce

With e-commerce, small value/expedited shipments have grown very rapidly, and
this trend is augmented under the COVID-19 situation. This includes where
international road transportation experienced severe conditions (for example, clo-
sure of the border posts, trucks and cargo can cross the border while drivers are not
allowed). Air transportation may be the best second choice to replace international
road transportation. Air transportation has one constraint in that its airway bill is

6
AEO is preferential treatment for highly compliant economic operators. It is discussed in detail in
Chapter 4.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 37

Box 2.1. Trade Financing by LC and B/L

1. The risk of the seller (exporter): it ships the cargo but does not receive the payment.
The risk of the buyer (importer): it pays the amount but does not receive the goods.
2. A solution has been used since the 19th century, where
a. The buyer opens an LC in its bank.
b. The seller and buyer conclude the international trade sales contract.
c. The buyer’s bank issues the LC to the seller.
d. The seller ships the cargo to the carrier; in exchange, the carrier issues a B/L.
e. The seller provides the B/L to its bank; in exchange, the bank pays the amount.
f. The seller’s bank provides the B/L to the buyer’s bank; in exchange, the buyer’s bank
pays the amount.
g. The buyer’s bank provides the B/L to the buyer; in exchange, the buyer pays the
amount.
h. The buyer presents the B/L to the carrier; in exchange, the carrier releases the cargo.

Export f. B/L in exchange Import

country Seller’s of payment Buyer’s country
bank bank

g. B ayme
of p
ent ange

/L i nt
ne
h

a. Op
of p in exc

xch
C
c. L

an
en LC
aym

ge
/L
e. B

Seller Buyer
b. International trade sales contract (Invoice)

d. B/ in
L
of ca in exchan ased
rgo s g o rele /L
hippe ge Carrier ar
h. C ange o
fB
d
exch

3. The LC specifies what documents must accompany the B/L; these are usually necessary
documents for customs and other clearance in the importing countries, that is, com-
mercial invoice, packing list, insurance policy, and, if needed, certificate of origin, export
quarantine certificate, technical standards conformity certificate, laboratory test result,
and so on. The banks scrutinize them to determine if they are the ones specified in
the LC.

Source: Authors.
Note: B/L = bill of lading; LC = letter of credit.

not a title document of the goods but is a transport document in which the goods’
value information is indicative and not checked by the third party (for example, a
bank). Worse, the e-commerce business model often separates the two work
streams: sale of the goods (seller–buyer) and transportation of the goods (seller
[consignor] and carrier [consignee]), which are salient characteristics of a small/
expedited shipment. A few countries limit the number of such e-commerce service

©International Monetary Fund. Not for Redistribution

38 Customs Matters: Strengthening Customs Administration in a Changing World

providers, which are obliged to share the sales “Growing e-commerce, par-
information with the customs administration. ticularly low-value ship-
Most customs administrations may receive trans- ments, reveals challenges
port documents but not sales documents. Revenue
on several fronts, includ-
collection on e-commerce is still in a learning
phase. The international customs community, ing VAT collection.”
notably the WCO, advises that customs adminis-
trations, working with appropriate agencies or ministries, should consider applying
various types of models of revenue collection (for example, vendor, intermediary,
buyer, or consumer, and so on) for duties and/or taxes.7 Although the scope is
limited to value-added tax (VAT), there are countries that VAT on low-value
import is collected by tax administration, directly from the vendor or intermediary
in the exporting countries, in collaboration with customs administration (Brondolo
and Konza 2021).
For certain countries, clarification and/or review of the “personal use” defini-
tion (goods for personal use may be waived from duty8) is needed as it is vague
and de minimis level (on customs duties and on VAT) may not be provided.
Many countries set a certain quantity or value of imports as a threshold by which
trade needing a formal import declaration is distinguished from trade subject to
a simplified report. There are instances of traders dividing one large shipment
into many small lots to evade commercial trade obligations. Customs staff need
the capacity to detect such traders’ duty evasion efforts.
The de minimis approach also attracts global debate. One can argue that in
order to promote digitalization, the duty on e-commerce related to small value/
expedited shipments should be waived and de minimis level be increased; one can
also argue that de minimis, particularly that of VAT on imports, undermines the
competitiveness of domestic industry (not necessarily the manufacturers but also
domestic retailers) and therefore should be abolished.9 The original concept of de
minimis is that if the cost of collecting tax exceeds the amount of collected tax, it
should be waived. Following this concept, if new technology or techniques are
invented to collect tax in a less costly manner, the tax should be collected.
Sharing of experiences on the issues above has started and key lessons learned
have been compiled by the international customs community (WCO 2018).
Standards have been developed on the following eight thematic areas: advance

7
For example, WCO (2018a) indicates the intermediary collection model where the intermediary
service operator (for example, e-commerce provider, express-shipment company) calculates, collects,
and remits all applicable taxes on behalf of the nonresident vendors, assuming these intermediaries
have the knowledge to calculate and remit the accurate amount of taxes in the importation country.
For projects started in Australia, New Zealand, the United Kingdom, and so on, the WCO also sug-
gests other options, such as the “buyer/consumer collection model,” the “vendor collection model,”
or a combination of the two.
8
Countries, such as Sri Lanka, tend to grant a generous waiver for the expatriate’s (temporary) return
to the country, allowing them to bring substantive amount of imports without duties.
9
For example, the European Union removes the exemption for imports of goods in small consign-
ments of negligible value (EU 2017).

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 39

electronic data and risk management; facilitation and simplification; fair and
efficient revenue collection; safety and security; public–private partnerships; pub-
lic awareness, outreach, and capacity building; measurement and analysis; and
leveraging transformative technologies.

Trade in Secondhand Items

The internet’s ease of sharing information allows parties to resell goods instead of
discarding them. The resale of secondhand items has increased even in cross-
border trade, from small items to big items, such as manufacturing machinery,
trains, aircraft, and ships. The creation of new HS classifications for worn cloth-
ing and used pneumatic tires is evidence of the growth in this trade.
It is highly likely that secondhand products’ duty rates or regulations may
differ from those applied to new products. Customs needs to distinguish between
new and secondhand products. Furthermore, the rules of origin of secondhand
products need careful attention in terms of differences in trade statistics and
regional trade agreement (RTA)10 application. Accordingly, secondhand items
offer challenges to the customs officer: to assess whether they are secondhand, to
identify the goods’ origin, and to determine if the associated duty rate and neces-
sary certificate are different.

Trade in Mixed Goods/Intangibles

More companies are seeking income through subscription business models11 rath-
er than lump-sum goods sales. Moreover, digitalization may characterize the goods
after downloading the software/application. If the goods’ value relies on such ser-
vices or intangibles, the concept of customs valu-
ation may face challenges. Mixed goods/intangi- “Increasingly goods are
bles are not necessarily new. In the past, a WCO value-added by services
Technical Committee on Customs Valuation and intangibles; trade in
advised on the customs valuation for portable such mixed goods/intangi-
media of audio/visual assets. Trade in master film bles raises challenges for
for theater and detailed blueprint paper of large
customs valuation.”
construction projects can be examples. A goods/
service mixture can also be found in leased goods; the lease is a service activity and
does not charge for the leased goods but on the right to use them. For example,
leased goods can qualify for temporary duty suspension, but there are cases where
the lease contract was extended several times and years; hence duty suspension is
extended too. In the future, the evolution of business models will create more
complicated cases. So far, a mobile phone device is charged customs duties. Yet,
for example, if someone starts a business with secondhand mobile phones and
gives them free of charge to foreigners to make a profit through data usage on
these phones, the question is if the goods have a fixed value or if the value is for

10
RTAs are mainly addressed under GATT Article XXIV (free trade agreement and customs union).
11
The subscription business model is defined as a business model in which a buyer pays a recurring
price at regular intervals for use of or access to a product.

©International Monetary Fund. Not for Redistribution

40 Customs Matters: Strengthening Customs Administration in a Changing World

pure service. Another challenge is posed by the emergence of new intangible tech-
nologies, such as 3D printing (as indicated in Chapter 1). With the consequent
shortening of GVCs, the digital data blueprint will likely take up a greater portion
of the value of a product, which in the past would have been fully taxed by cus-
toms when crossing borders as a tangible product. As a result, tax and customs
administrations may attempt to replace lost tax revenue by taxing the digital or
intangible service flow and thus put such companies under greater scrutiny.
Manufacturing processes, if conducted on a fee or contract basis, are considered
a service under WTO rules. Such services are included in the General Agreement
on Trade in Services (GATS) Sectoral Classification List that has been generally
used by WTO members to schedule their specific commitments in services under
the GATS. Whenever an economic entity performs such functions, the GATS rules
apply. As a result, a different set of trade rules—trade in goods or trade in services—
applies to otherwise identical operations and the resulting products, depending on
who owns the inputs and outputs. Thus, structural differences between GATT and
GATS could be used by economic operators to circumvent trading partners’ use of
GATT-based tariffs (and trade defense instruments, especially anti-dumping and
countervailing duties). Given increasing size of manufacturing services in the com-
mercial activities, a number of statistical offices now provide relevant data concern-
ing “manufacturing services” despite the conceptual complexities involved.12
These issues need an internationally harmonized approach. Customs adminis-
trations should engage in the international study and policy formulation dia-
logues, which would facilitate familiarization with the topic, the different
options, and other countries’ efforts and lessons learned.
Data-driven business models are accelerating, becoming critical to everything
from manufacturing to services, some of which involve cross-border exchange.
According to an IMF blog (Lagarde 2018), “Recent trends on global trade have
tended to focus on protectionist measures and diplomatic tensions… Yet what is
often lost in the current discussion is that we are entering a new era of trade.

TAX POLICY
Taxes and Customs Administration’s Collection Role
Value-Added Tax
As indicated in Chapter 1, a key evolution in tax policy in the world has been the
introduction of  VAT.  VAT is promoted by the IMF as it is theoretically more
growth friendly because it is neutral to business and arguably less harmful to
economic competitiveness than excises and customs duties.13 VAT is assessed at

12
In Hong Kong, for example, imports of “manufacturing services” reportedly amounted to
HK$139.5  billion in 2011 or 3.4  percent of the economy’s total imports of goods and services
(24.1  percent of total imports of services) (Census and Statistics Department, Hong Kong Special
Administrative Region 2013).
13
Gemmell et al. (2014) show that consumption taxation is less harmful for growth than either per-
sonal or corporate taxation. It is also confirmed by Acosta-Ormaechea et al. (2018).

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 41

every point along the value chain, including importation. VAT on imports is
usually collected by customs administrations at the time of import clearance,
which can be regarded as a withholding tax (Keen 2007b),14 whereas VAT on
value addition in the domestic market is collected by the tax administration. In
many countries, VAT paid during production will be refunded at exportation
(export VAT refund), which is usually handled by the domestic tax
administration.
Customs’ VAT collection is imperative to countries, particularly those having
weak domestic tax administration or low domestic tax compliance. The share of
customs’ VAT collection in relation to net VAT revenue is diverse, depending on
the respective size of imports and exports vis-à-vis GDP, the capacity of domestic
tax administration collection for VAT, and the national industry structure; the
average share of customs’ VAT collection in VAT collection in low-income coun-
tries is 40.3 percent and that of emerging markets is 53.7 percent (see Chapter 1,
Box 1.1). In the longer term, however, when the domestic economy, particularly
the service sector, becomes stronger and the value addition by the domestic eco-
nomic activities increases, the size of imports to the GDP declines, as does the
share of customs’ VAT collection in relation to the net VAT collection.15

VAT and Customs Administration

Many customs administrations consider that “Customs may underesti-
VAT collection is no more difficult than customs mate the impact of VAT
duties collection, which may underestimate the
on imports and the risk
challenges (Keen 2007a). The reality of VAT in
countries, particularly in low-income countries, associated with VAT
is different from what the IMF may advise— management.”
single flat rate, broad VAT base, no/little exemp-
tion, or zero rating.16 Also, it appears different from the theory, for example, VAT
is less vulnerable against lower-value import declaration because such margins
would be captured at a subsequent point in the value chain and charged accord-
ingly; and all the goods are retained under customs’ supervision until the duty/
tax is paid. The reality creates several challenges to customs administration in
VAT management. The major ones with possible mitigation options are the
following:
• Importation can be the final moment where VAT can be collected, for
example, import is the final consumption. A low VAT threshold in the
domestic economy and low compliance of taxpayers in the domestic value

14
It also discusses withholding taxes on imports and/or exports, which partially or completely cover
income tax obligations for informal traders.
15
This could be a very long-term perspective. One could argue that decline would be less pro-
nounced in lower-income countries, whose economies continue to rely heavily on agriculture and
manufacturing.
16
Acosta-Ormaechea and Morozumi (2019), for example, advocate that increasing VAT revenue
through base broadening with fewer reduced rates and exemptions is more growth friendly than doing
so through standard rate increases.

©International Monetary Fund. Not for Redistribution

42 Customs Matters: Strengthening Customs Administration in a Changing World

chain can lead to lower-value import declarations and the risk of revenue
leakage regardless of whether the goods are subject to customs duty or are
duty free. Customs needs to review the selectivity criteria for valuation,
which may be based on risks related to customs duty and excises but not
to VAT.
• VAT has multiple rates and exemptions and zero rating are granted to cer-
tain commodities. This creates a risk of tariff classification slippage to
exempt or lower/zero rates. Again, customs needs to review the current
selectivity criteria for classification determination, which may be based on
risks related to customs duty and excises but not to VAT.
• Certain importers are granted VAT exemption at importation (for example,
mining sector, public investment project operators). This creates a risk of
diversion. Customs needs to assess the diversion risk of VAT exemptions for
targeting at post-clearance audit or end-use verification and incorporate that
VAT diversion risk in close cooperation with the tax administration.
• An import can be divided into several small shipments (declarations), evad-
ing customs control by making each of them lower than the threshold of
normal customs procedures and/or VAT de minimis. This is already a prob-
lem in customs duty collection, but as VAT covers more commodities, the
significance may be larger than customs duties alone. Customs should
consider strengthening collaboration with the tax administration, interme-
diary service providers, and other stakeholders to create a solution (for
example, better profiling of shippers and importers, intermediary collection
model using vendors, buyers, consumers, and so on). The profiling of
exporters and importers needs to be strengthened to trace similar transac-
tions in the past.
• VAT de minimis at the importation can be very low or there is no de mini-
mis, regardless of the customs duty de minimis. This means that all the trade
and passengers’ goods are subject to VAT on import. This includes in certain
countries where local residents cross the border for grocery shopping.
Customs needs to review the border processes so as not to create queues for
processing VAT on low-value goods (and to advise policy makers of neces-
sary mitigation, for example, change in the VAT de minimis at importation
and consider negotiating a VAT cross-border adjustment mechanism with
the neighboring countries17).
• Export VAT refunds need customs support. The amount of the export VAT
refund is the VAT paid during the production of the exports; thus, customs
may not need to assess the exports’ value for this purpose but may need to
verify that the goods have physically left the country to prevent export VAT

17
For example, Lesotho customs (Revenue Authority) collects grocery stores’ receipts at the border
from the passengers who buy groceries in South Africa and bring their goods into Lesotho. Then it
claims the amount from South Africa Revenue Authority to transfer to Lesotho.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 43

fraud. Export verification that the goods exit the country has not been a
customs’ interest for decades in many countries.18 Customs needs to recon-
sider its important compliance role in export monitoring.
• Domestic goods’ shipment to a SEZ may be treated as an “export” and eli-
gible for VAT refund under the VAT law, while it may not be an export
under the customs law. This may create a pitfall, and neither revenue admin-
istration may monitor such movement. Similarly, in some countries, citizens
buy items, such as groceries, in the SEZ to avoid VAT. Customs needs to
strengthen in/out monitoring from the SEZ regardless of the goods’ status
(international or domestic goods) and in cooperation with the tax
administration.
An estimate of the compliance gap regarding VAT on imports is difficult as
national accounts are based on declared value. Mirror analysis, comparing
declared imports with declared exports by exporting countries, is a powerful tool
to detect customs fraud when conducted at the finest possible level of detail.
However, as there may be many potential explanations for data discrepancy, esti-
mates of missing revenue due to fraud or customs malfunctions cannot be derived
directly from the mirror analysis.19 More credible gap analysis uses surveys of
direct observation of imports or shadow/informal economy studies, but they can
be difficult and time-consuming, present incremental results, and be subject to
systematic bias. Box 2.2 illustrates some methods applied to estimate the evasion
of VAT and other taxes on imports. A compliance gap found in imports does not
necessarily translate directly into the total VAT gap. If evaded, import VAT sim-
ply reduces input tax credits (that is, provides cash flow benefits only to evaders);
it will not contribute directly to the total VAT gap. Nonetheless, any compliance
gap found in imports is an important risk indicator for compliance, indicating
likely systemic risks in downstream supply chains.
Despite the challenges listed previously, VAT collection at importation may
still be less difficult than VAT collection in the domestic value chain where
domestic economic activities are more difficult to capture for tax administrations.
Comprehensiveness of VAT collection is often measured by C-efficiency, being
defined as follows:
VAT revenue
C-efficiency =
Standard rate × Final consumption

18
Except those having an export tax. Also, transited countries are always keen that transit cargoes exit
the country (but not as export though).
19
Import statistics are compiled by the country of the goods’ origin, while export statistics are com-
piled by known destination country. The two do not match due to transshipment, re-export, second-
hand items in the third country, and so on. For example, a car manufactured in Japan was used in
Thailand for a year and is re-exported to Cambodia: Japanese export statistics count zero to Cambo-
dia, Thai export statistics counts one car export to Cambodia, and Cambodia import statistics counts
one car import from Japan. Similarly, Singapore exports a massive volume of whisky to Japan, while
Japan does not import from Singapore as no whisky is originated in Singapore.

©International Monetary Fund. Not for Redistribution

44 Customs Matters: Strengthening Customs Administration in a Changing World

Box 2.2. Methods Applied to Estimate the Tax Evasion on Imports

Several methods have been used to estimate the tax evasion of VAT and other taxes on
imports. Overall, such models are categorized into two approaches: “bottom-up,” which is
based on an analysis of a “microeconomic” nature, that is, disaggregated data from surveys,
samplings, and audit, often in a specific trade sector and activity; and “top-down,” which is
based on an analysis focused on macroeconomic data and national accounts. More gener-
ally, noncompliance in taxes on imports is included in estimates of the total compliance
gaps for individual taxes, though it is not usually quantified as a specific component of the
tax gap.

Bottom-Up Approach
• Market Intelligence. Interviews with legitimate economic operators, who can be
domestic producers or distributors, may provide information of irregular market
trends and sometimes more information relevant to the contraband products as a
whistleblower or competitor. A price comparison between the identical foreign
goods sold in a domestic marketplace and declared value at the importation may
provide hints of informal activities. As another market intelligence method, a study
comparing the data of imports, final consumption in the domestic market, and
exports of certain products may provide information to detect informal activities. In
this method, it is important to target certain sensitive product group(s) and regularly
examine both import and export statistics as well as consumption patterns in the
domestic market.
• Specialized Market Research and Garbology. There are companies that carry out
special market research to estimate the size of informal markets through, for example,
garbology, which is the study of trash and garbage. The result could indicate an actu-
al size of foreign products in the market, which can be compared with customs clear-
ance data or even, for some products, an indication of the amount of smuggled goods
directly through checking manufacturers’ labeling of packaging.
• Surveys of Wholesale or Outlet-Type Stores. This is especially relevant when the
traceability framework is established by tax stamps, chemical markers, and traceabil-
ity coding. The key requirements for this type of survey are a high level of point-of-
sale coverage and a preferably quick and efficient method of determining whether
products have been taxed.
• Control on Passengers’ Belongings. This is relevant to portable excised items and,
in certain countries, luxurious goods, which can be wearable and kept in a hand lug-
gage, particularly when most smuggling is carried out by passengers who disem-
barked on foot or in small vehicles through a few border-crossing points. For certain
contexts—for example, high excise duty on tobacco products—the incidence of this
type of smuggling could be very high. Yet the control could be labor-intensive and
sometimes physically difficult because of too many passengers, in which case, statis-
tical sampling techniques could be used to make the exercise cost-effective.
• Cross-Check between Customs Clearance Data and Tax Administration’s Tax
Return Data. Trade transaction data can be compared with the tax return data, that
is, in general income and/or VAT returns (sales reports and information on the VAT and
the other taxes paid on imports). This can be a very useful method to detect tax eva-
sion but depends on consumers’ reporting of the consumption or purchase of goods,
which can take time. To improve cost-effectiveness, it is also important to target cer-
tain sensitive product group(s) either because the product group(s) represent a high
risk or because the product group(s) are a good indicator of what is happening at the
sector level.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 45

Top-Down Approach
• Mirror Analysis of Trade Statistics. National import statistics can be compared with
trading partners’ export statistics and national export statistics can be compared with
trading partners’ import statistics, both in terms of volumes and values by commodity
or commodity group and by country. The gap between the two may provide indica-
tive information that needs further examination on several aspects, one of which may
be possible fraud.
• Based on Estimated Black-Market Size. There can be several approaches to esti-
mate black market size. An example is calculation of discrepancy between the income
measures of GDP and the expenditure measures, which discrepancy may represent
informal activities as the incomes side is measured through the value added by the
formal economy while on the expenditure side includes self-reporting.20 Based on this
estimated consumption including on the black market, import size including fraud
may be estimated, which can be compared with the data based on the customs clear-
ance data. This method relies on the quality of income and expenditure measures of
GDP, and the discrepancy between the two can also be attributed to other factors,
such as differences in sampling, whose impact cannot be separated from that of
informal activities.

Sources: Hutton 2017; Thackray and Alexova 2017.

One hundred percent C-efficiency means that there is no missed collection. In

reality, this never becomes 100  percent because there are various types of gap,
broadly categorized into two groups: (1) a policy gap, namely the additional rev-
enue that would be raised, given perfect enforcement, if all consumption were
taxed at the current standard rate (for example, no exemption/zero-rating); and
(2) a compliance gap, namely the additional revenue that could be raised if cur-
rent VAT rules were perfectly enforced. Figure 2.1 indicates C-efficiency and the
estimated decomposition of the gap across income groups.
In considering the nature of VAT, if C-efficiency is low and the compliance
gap is large, undervaluation at importation may not be compensated subsequent-
ly in the value chain. Therefore, customs administrations must focus more on
valuation.21
Customs administrations understand that a large percentage of VAT on import
becomes an input tax credit for domestic businesses. Having customs administra-
tions devote more attention to valuation control is not enough. The customs
administration should help the tax administration improve the capture of the
subsequent value chain by sharing import transaction data and risk profile

20
This approach needs input from the statistics agency producing the national accounts figures being
used. Published, balanced national accounts should include the nonobserved (informal) economy in
all three aggregate measures of GDP, often as adjustments made to one measure or another in the
balancing process. Such adjustments will need to be taken into account in comparing expenditure
and income GDP figures.
21
If import VAT’s share is small in total customs collection and customs duties’ share is large, cus-
toms valuation is important. This does not necessarily mean that with high C-efficiency and a small
compliance gap, customs administrations may lose control of valuation (because it will be recaptured
in subsequent value chain).

©International Monetary Fund. Not for Redistribution

46 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 2.1. C-Efficiency and Decomposition of Gap

(Left scale: VAT gap, % of GDP; right scale: gap C-efficiency ×100)

Compliance gap Policy gap VAT C-efficiency

9 60
8 53 53
50
7
44
6 4 40
5 6
30
4 3 4
26
3 20
2 4
10
1 2 2 2

0 0
High income Upper middle Lower middle Low income
income income
Source: Keen 2020.
Note: VAT = value-added tax.

information of taxpayers. This can be done through better customs–tax coopera-

tion (details discussed in Chapters 3 and 7). To follow up this agenda, a data item
of VAT on imports should be created in the tax revenue statistics and monitored.

Excises
Insofar as excises are levied on business inputs, they are not economically growth
friendly. However, excises may be useful to reduce overall demand for targeted
goods that are deemed harmful to society (because
of their adverse impact on health and the environ- “Excise, as a tax on exter-
ment, for example). In the modern world, excises nalities, fits in the modern
are used as a tax on externalities. Thus, excises can world; its management
discourage the consumption of harmful goods,
needs more technology,
including alcoholic beverages, tobacco products,
and fuel, especially if they are taxed at specific notably traceability.”
rates, such as per kilogram or per unit—with the
assumption that cheaper goods may be worse (for example, more polluted, more
harmful, less energy efficient). Excises are charged at the time of ex-factory or
importation. In those countries that do not produce such items, excises are collect-
ed solely on imports. As society matures, becoming more socially conscious, more
interested in environmental stewardship, and advocating for more control over
externalities, the need to apply excises continues (for example, on fuel, tobacco
products, alcoholic and carbonated beverages, and petroleum products).
The internationally established practice on excisable items is to secure traceabil-
ity22 through which customs post-entry control and the buyer can identify if the

22
Traditionally, a tax stamp seal. In modern days, unique tracking identifier.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 47

item is legitimate or smuggled. Traceability technologies and services have grown for
several purposes, not only for customs administration but also for other public sec-
tor and private sector use, that is, supply chain management, logistics management,
product recall capacity, and intellectual property rights (IPR) infringement controls.
While excises are targeted at specific items, there is always the problem of gray zone
products, including issues of goods classification. Since volume is often the tax base
of several excises, measurement of volume remains an important issue in customs
administration (for example, how to measure the liquid volume inside a metal tank).

Import Tariffs
Import tariffs are not advisable from the perspective of growth-friendliness
because they distort decisions of both consumers and producers. However, they
may be considered necessary to protect temporarily certain domestic “infant”
industries and/or maintain certain levels of domestic production of essential
goods (such as food or medical products). Although import tariffs remain an
important source of tax revenue in many developing countries, particularly those
with relatively low incomes or lacking the capacity to implement internal taxes,
there is a clear need and, in fact, tendency to reduce tariff rates (whether multi-
laterally, unilaterally, or otherwise). (See more details in the section “Trade
Policy.”) Table 2.1 indicates such a decline in import tariff rates, regardless of the
level of development or region. It is noteworthy that VAT rates are higher than
the simple averages of the applied most favored nation (MFN) tariff rates; trade-
weighted average applied MFN tariff rates and applied preferential tariff rates are
even smaller than the simple MFN averages.
Impacts of tariff reduction on revenue may be diverse depending on elasticities
of demand for imports—to what extent trade volume will increase by reduction
in the prices (duties)—which may differ by commodity and by country. The
volume effect also impacts collection of VAT on imports, but it may be positive,
as VAT generates revenue even from duty free imports.23 Trade facilitation reduces
the goods’ price through reducing trade transaction costs without reducing the
duty rates.24 With proper trade facilitation and no decrease in compliance, the
anticipated effect of trade facilitation is an increase in both customs duties and
VAT on imports. At least, when looking at the share of each tax in customs col-
lection, the share of customs duties declines while the share of VAT on imports
increases. The decline in the share of revenue from tariffs as a proportion of total
tax revenues has been largely offset by increased revenues from VAT on imports.
Today’s typical customs collection for a low-income country that has a VAT con-
sists of VAT on imports (50 percent), excises on imports (25 percent), customs
duties (15 percent), and miscellaneous (10 percent).25 The foregoing figures are

23
Certainly, exclude few items of VAT exemption and zero-rated. Customs duty rate reduction will
impact to VAT on imports with limited significance.
24
For example, since OECD (2002), trade transaction cost is estimated around between 2 to 15
percent of imports.
25
Similar composition is reported, for example, Kokoli et al. (2021). VAT collection on imports as
percentage of total revenue collected by customs administration is found in Chapter 1’s Box 1.1.

©International Monetary Fund. Not for Redistribution

48 Customs Matters: Strengthening Customs Administration in a Changing World

TABLE 2.1.

Customs Import Tariff Rate and VAT Rate

Tariff rate VAT rate
Group 1990 1998 2008 2010 2018 2020
All countries 11.2 9.8 8.0 8.3 6.9 16.1
OECD countries 6.2 5.2 3.0 3.2 2.7 19.4
Non-OECD countries 16.7 12.2 9.2 9.4 8.0 14.9
African countries 19.8 18.3 12.9 12.5 10.3 15.8
Asia Pacific countries 37.5 9.9 8.7 7.8 7.5 11.6
Middle East countries 28.1 25.1 8.9 8.8 6.8 13.0
Western Hemisphere countries 33.5 11.2 8.5 10.5 9.0 14.8
Source: Author’s calculation as simple average of 131 country data based on tariff rates (WTO 2021) and VAT rates
(PwC 2021).
Note: OECD = Organisation for Economic Co-operation and Development; VAT = value-added tax.

indicative and differ country by country; for example, if a country’s trade is pre-
dominantly with RTA partners, the customs duties’ share in customs collection
may be nearly zero.
Thanks to the VAT on imports, the customs administration will remain an
important agency for domestic revenue mobilization even as trade taxes continue
to decline.26 Also, excises will continue to play an important role in addressing
externalities. The share of revenue collected by customs in total tax revenue—
defined as duties and taxes collected using customs resources, notably VAT on
imports, excises on imports, and customs duties—is approximately 50 percent in
lower-income countries and 10  percent in higher-income countries (see
Figure 2.2). It is noteworthy that, even in advanced countries, customs continues
to be a meaningful revenue collection body. In some countries, the governments
underestimate the customs revenue collection role and perceive that customs
emphasizes only trade facilitation and border security; they should reconsider the
customs role in revenue, particularly with revenue collection continuing to move
up the important agenda of governments to finance measures necessary to address
emerging needs, such as the COVID-19 crisis, and to achieve the Sustainable
Development Goals.27

Carbon Border Tax from the Customs’ Administrative Perspective

The carbon border tax (CBT), also known as the carbon border adjustment
mechanism, has been discussed in the the European Union and the United States.
The premise is that the tax would reflect the amount of carbon emissions attribut-
ed to goods imported into the country. It may give rise to rebates to exports. The

26
VAT on imports may be refunded before final consumption, but in a sense, this is a withholding
tax collected by using customs’ resources without which much of it may not be collected. VAT on
imports should be assessed as customs collection.
27
A minimum tax-to-GDP ratio (or tipping point) of about 12¾ percent of GDP is associated with a
significant acceleration in the process of growth and development. A country just above this threshold
will have GDP per capita 7.5 percent larger after 10 years (Gaspar et al. 2016).

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 49

Figure 2.2. Customs Collection’s Share of Total Tax Revenue in Relation to

GDP per Capita
100
Customs collection in total tax revenue (%)

75

50

y = –9.628ln(x) + 121.12
R² = 0.3242
25

0
- 20,000 40,000 60,000 80,000 100,000 120,000
GDP per capita (PPP, USD)
Source: IMF staff calculations using WCO (2018b).

revenue may be used for subsidies, including “As the carbon border tax is
export subsidies, to domestic industry to compete being designed, it is imper-
with foreign producers with relaxed carbon emis- ative that customs provide
sion regulations and to prevent the move of
input on enablers and chal-
domestic production outside the country. CBT’s
purpose may be to create a level playing field, lenges from the perspective
which appears closer to the purpose of excise of implementation.”
duties on imports with possible rate differentia-
tion by goods’ origin.
CBT is a new tax, likely to be collected by customs administrations. It is still
under design by some countries, and many details are not yet known, including
if this will be akin to customs duty or excise. The European Union’s program was
announced in June  2021. This chapter does not discuss CBT’s tax policy
aspects—for example, alignment with the WTO rules, the level of tax rate by
commodities, how to set the rate, and the impact to the economy and particular
industries—but discusses possible issues from the perspective of administration.
CBT may increase customs revenue collection significantly.28 Therefore, during
the design stage, thorough preparation by customs is imperative, which includes

28
According to Pomerleau (2021), the European Commission estimated that the CBT could increase
revenue in between EUR 5 and 14 billion (approximately 0.03 and 0.1 percent of GDP) annually to
the European Union depending on the actual mechanism’s scope and design of CBT whereas current
customs duties collection is EUR 26.7 billion, among which EUR 21.3 billion is of the European
Union’s, that is, 13 percent of EU revenue.

©International Monetary Fund. Not for Redistribution

50 Customs Matters: Strengthening Customs Administration in a Changing World

input to the policy makers on administrative enablers and challenges from the
perspective of customs administration. If CBT becomes a tax that is difficult to
administer and enforce by customs, a satisfactory level of compliance will not be
achievable, and CBT will likely fail to meet its original objectives. Some of the
possible challenges in CBT implementation are described in the following
paragraphs.

Procedures and Selectivity Criteria. CBT will have multiple rates by commod-
ity and on the same commodity coming from different countries, which apply
different carbon prices. The commodities subject to CBT may not be clear—for
example, imports of commodities under the steel, cement, paper, and other spec-
ified sectors. The tax rates may be determined by carbon pricing or an index
calculated by the carbon footprint matrix, which may provide different rates by
industrial sector (or commodity) and by country (for example, exporting, manu-
facturing). In addition, producers in countries (hopefully not particular compa-
nies in the country) with carbon-pricing mechanisms that the importing country
agrees are compatible with its own may be exempt from this tax. This may look
like a rule-based discriminatory tariff. Development of the tariff schedule in the
customs clearance ICT system may be labor-intensive but not difficult. Yet,
because CBT will discriminate imports by commodity and country, based on the
rules of origin (RoO)-related challenges being faced by customs administrations
in RTA implementation, the actual procedures and administration may be com-
plicated, and the administrative burden may need to be reassessed. Also, there will
be a risk of classification slippage and forged country of origin. Customs admin-
istrations should assess the possible risks of fraud and prepare to modify the
selectivity criteria accordingly.

Determination of Goods Origin. In most cases, for imports applying RTA pref-
erential duty treatment, the certificate of origin must be presented to the customs
administration. Since CBT covers all the countries, it may need proof of the
goods’ origin for all the imports (or those commodities subject to CBT). A ques-
tion remains if CBT will: retain third-party certificates of origin, replace them
with self-certificates by the manufacturer or exporters, or will not ensure the
goods’ origin. It is likely that re-exported products with/without manipulation
and secondhand products will face confusion because their linkage with the
goods’ origin is weak. Traditional third-party certificates will be so labor intensive
and costly that it would disrupt the supply chain (Hillman 2013). The complex-
ity of rules of origin and certificate of origin as well as self-certification of goods’
origin is explained in the following section of this chapter. Customs may lack the
capacity to verify the origin of all the imported goods without help from foreign
partners and disruptive technologies (Chapter 7).

Traceability. A carbon footprint matrix may be produced by commodity and by

country. Intermediary material can be shipped to the other country where a

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 51

product is produced using this material. For example, Japan can produce a car
using Japanese steel, but it can also use a Chinese steel product. If the company
is conscious of a risk of supply chain disruption, it is reasonable to divert the
material/parts and even manufacturing lines. A manufacturing company may not
know the origin of the material and parts it is using, and that probably is ever
changing. In addition, since CBT may be discriminatory taxation from the point
of view of the manufacturing country, legal or illegal circumvention will be
inevitable.
From the customs administration perspective, a question would be how the
cross-border supply chain will be accounted for or not accounted for in CBT and
whether customs needs to verify it. Some customs administrations may be, to
some extent, knowledgeable in traceability and the value chain in production
through experience with the value-addition rule of origin in RTA (for example,
cumulative criteria of RoO). Traceability of materials/parts will represent an enor-
mous workload, and even when customs finds irregularities in the documents, it
is not clear what sort of corrective measures are possible when the document is
forged by an exporter (for example, a penalty to the importer?). But importers
may be a victim too (unless there is collusion with the exporter/manufacturer).
Although it depends on the rules of origin, information on origin of intermediary
material may be overwritten by the final product. Statistics of trade in value added
(TiVA) is a delayed index, an academic product, and not yet a base for taxation
purposes.

Cooperation with Stakeholders. CBT may give rise to an export rebate. Such a
rebate would be equivalent to a VAT refund or excise refund for export or to
inward processing linked to inputs and a preset yield (see “Investment Policy
(Duty/Tax Incentives”) or could be more like an export subsidy linked to export
value. Interagency cooperation with the tax administration, other line ministries,
and economic operators will be needed. In considering the usefulness of interna-
tional cooperation in verifying the self-declaration of origin issued by exporters
and conducting other administrative assistance, international cooperation with
foreign customs or other agencies might be also helpful to implement CBT.

Customs–Tax Cooperation
Other chapters, particularly Chapter 3, discuss customs–tax cooperation in more
detail. Tax administrations all over the world struggle with strengthening their
capacity to capture and trace the value chain. Importation is a significant starting
point in the value chain in the country, and the customs administration basically
captures the entire importation. Customs’ trade transaction data help tax author-
ities trace the value chains, starting from the imports, and assess the corporate
income derived from exports (and expenditure on imports). Tax administration
information (for example, sales reports) is useful for customs to conduct post-
clearance audits. For both administrations, sharing risk profiles of traders and

©International Monetary Fund. Not for Redistribution

52 Customs Matters: Strengthening Customs Administration in a Changing World

taxpayers helps them improve their risk management and targeting for audit
and control.
Customs also functions as a tax withholding agency for certain domestic taxes.
VAT payments on imports are business input credits for subsequent domestic
economic activities after the importation.29 There are countries where customs
administrations collect a certain amount of advance corporate income tax at the
time of importation to combat tax evasion. (This advance tax can then be credited
against eventual corporate tax paid if the enterprise is in a taxpaying position.) For
these practices, a good working relationship and cooperation between the two
administrations are imperative to success.
Customs’ role is increasingly important in combating the evolving base erosion
and profit shifting used by multinational enterprises (MNEs) to shift their profits
to lower tax jurisdictions and thereby avoid income taxes.30 Customs data can
play a useful role in enabling tax administrations to detect under- and over-
invoicing. Customs’ ICT clearance systems apply to all imports and exports, and
its selectivity system can easily report unusual unit values of imports and exports.
Regardless of the customs duty rate and duty exemption, customs should monitor
the value of both imported and exported goods as this can help detect possible
abusive transfer pricing practices. The same can apply to trade-based money laun-
dering and the data sharing with the financial intelligence unit. Domestic transfer
pricing can also happen if the national laws grant companies operating in a SEZ
lower statutory corporate tax rates than outside the zone and do not prohibit an
establishment of a subsidiary in the  SEZ.  Although this is not recommended
practice, if it occurs, as the tax administration may not have access to economic
activities within the SEZ, customs should share the pertinent data with the tax
administration and help it address domestic profit shifting.

TRADE POLICY
Multilateral Trading System
Trade policy today is regulated by the WTO rules, namely the multilateral trading
system. Welfare gain through trade liberalization, particularly for small countries,
is apparently widely understood, and to a very large extent countries follow the
multilateral trading system. Box 2.3 outlines the principles of tariffs in the mul-
tilateral trading system.

29
At the outset of the introduction of VAT in a few countries (for example, in sub-Saharan Africa)
where domestic tax administration is not ready to collect VAT and taxpayers are not ready to report
VAT, the customs administration collects VAT on imports based on goods’ inflated customs value (for
example, 110 percent, assuming domestic value addition as 10 percent).
30
For example, Hollingshead (2010) estimated that the estimated range for tax revenue loss due to
trade mispricing in developing countries per year is between $98 billion and $106 billion annually
during the years 2002 through 2006.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 53

Box 2.3. Tariffs and Multilateral Trading System

• Tariffs are the only permissible instrument of trade policies.31 Domestic tax, user fee,
quantitative restrictions, technical requirements, subsidies, exchange rate policy, and
other instruments must not be used for trade policy unless such exception is provided
in the WTO rules.
• Maximum tariff rates of each WTO member are committed to the WTO. Each WTO
member submits a schedule of concessions, including a list of bound rates by goods’
classification, beyond which ceilings it cannot increase the duty rates without com-
pensation to the trading partners.
• Tariffs are subject to most favored nation (MFN) treatment. MFN stipulates no dis-
crimination between trading partners’ goods: that is, concessions accorded to one
country’s goods should be granted to those of all countries except cases of RTAs and
Generalized System of Preferences (GSP).32
• The applied duty rates are often lower than the bound rates. This is because bound
rates are the maximum rates within which WTO members can set the duty rates
(applied rates) freely subject to MFN, preferential duty rates may be applied under
RTAs, and developing countries are allowed not to bind substantial scope of tariff
lines.33
• Domestic tax and user fees are also regulated by the WTO, particularly national
treatment (NT). NT requires that imported goods be treated the same as or no less
favorably than “like” or “directly competitive or substitutable” goods produced domes-
tically so as to ensure that discriminatory internal taxes (as well as other regulations)
are not used as substitutes for tariffs.
• WTO members should reduce trade restrictiveness of any measures as much as
possible, including nontariff measures (NTMs). NTM has similar trade restrictiveness
to tariffs (or could be worse due to sunk cost). Its trade restrictiveness can be calculat-
ed by the cost to the trade, known as tariff equivalent. Trade facilitation is regarded as
an instrument to reduce the tariff equivalents of customs and trade procedures.
• WTO member accession needs compliance with WTO rules and conclusion of bilat-
eral market access negotiations with interested WTO members. For example, a least
developed country seeking a membership to the WTO can expect other WTO mem-
bers to request it to bind all of their agricultural tariff lines at an average rate of
50 percent and 95 percent of their nonagricultural tariff lines at an average rate of
35 percent (WTO 2012).

Source: Authors.
Note: GSP = Generalized System of Preferences; MFN = most favored nation; NT = national
treatment; NTM = nontariff measure; WTO = World Trade Organization.

Following the successful conclusion of the Uruguay Round of trade negotia-

tions and the establishment of the WTO in 1995, the simple average applied

31
Except contingency measures, trade remedies, and export taxes and restrictions.
32
GSP is preferential market access unilaterally granted from advanced countries to developing countries,
acknowledged by the WTO by its predecessor’s (GATT’s) decision, known as the “Enabling Clause.”
33
Bangladesh, for example, binds only 19  percent of its tariff lines. For those that are bound, the
overall gap between the simple average applied MFN rate and the simple average bound MFN rate
is 147 percentage points. Although this gap, coupled with the low binding coverage, provides Ban-
gladesh with ample scope to raise applied MFN tariffs, its average applied MFN rate has nevertheless
remained virtually unchanged during the past 10 years (WTO 2019b).

©International Monetary Fund. Not for Redistribution

54 Customs Matters: Strengthening Customs Administration in a Changing World

MFN tariff rate fell from roughly 18  percent to “Countries reduce the tariff
almost 10 percent in 2008, whether in line with rates through market
WTO members’ multilateral commitments or due access negotiations with
to their unilateral action. This reduction in tariffs
foreign countries as well as
is in recognition of their distorting nature and the
benefits of trade liberalization. As a consequence unilaterally.”
of the breakdown in the multilateral Doha round
of negotiations in July 2008, the simple average applied MFN tariff has declined,
but much more slowly since then, to approximately 8  percent in 2018 (WTO
2021). While developing and least developed countries’ average applied MFN
tariff rates have also continued to decline gradually since 2008, to 8.4 percent and
11.7  percent, respectively, they remain much higher than the average of devel-
oped countries (4.3  percent). Interestingly, more than half of the reduction in
applied MFN tariffs since 1995 was unilateral. Considerable unilateral cuts were
also made by developing countries, notably Bangladesh, India, Kenya, Morocco,
Nigeria, Peru, and Tunisia (World Bank 2020).

Regional Trade Agreements

As discussed in Chapter 1, the number of RTAs has increased significantly, and
there are many overlapping agreements with significant implications for customs
administration. The overall impact of this trend is contributing to the decline in
tariff revenues. Also, it increases the needs for monitoring and control of the
implementation of RTAs, which requires customs to distinguish between MFN
imports and imports from RTA partners in order to levy the appropriate tariff for
the former and grant preferential treatment to the latter.
The implementation of RTAs requires ensuring adherence to the RoO, which
is complicated and different in each RTA.34 RoO are composed of three elements:
origin criteria; consignment criteria (for example, trading route, nonmanipula-
tion requirements); and procedural provisions (for example, certificate of origin,
certificate of nonmanipulation). Origin criteria may be different by tariff lines
and by RTA. Origin criteria may be whether the products are wholly obtained in
the country of export. It may depend on to what extent the products are obtained
in the country incorporating materials which may or may not have been wholly
obtained there, or whether the materials have undergone sufficient working or
processing, and so on.35 These challenges become more acute when a country is a

34
A study of 149 countries estimated that RoO reduced the trade creation effects of RTAs by around
two-thirds of what it could have realized and that the costs of meeting RoO are equivalent to almost
half of the available tariff preferences (Anson et al. 2005). Together with inadequate understanding
of benefits of and requirements for traders, anecdotal evidence indicates that RTAs’ preferential duty
rates are not fully used.
35
In an RTA for the European Union, for example, solvents are considered as originating if the value
of all the nonoriginating materials used in their manufacture does not exceed 50 percent of their
ex-factory price; by contrast, for calculating machines, the value of the nonoriginating materials used
in their manufacture must not exceed 40 percent of their ex-factory price.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 55

signatory to several RTAs, as preferential rules of origin for the same goods may
differ from one agreement to another. In addition, the introduction of free trade
between subgroups of countries makes it necessary to effectively control imports
from third countries, which imposes a heavy burden on customs. Under these
conditions, anecdotal examples indicate that the quality of the customs of each
member country depends to a large extent on the quality of the weakest link
among these countries.36
Some origin criteria require tracing back the process, for example, the value
addition in producing the imported goods or the location obtaining substantive
parts and processing. In practice, customs administrations do not have such abil-
ity and may rely on the third-party certificate of preferential origin (C/O) issued
or endorsed by the authority of the exporting country, which is usually the oblig-
atory document in applying RTA preferential duty rate in the importing country.
Depending upon the RTA, C/O may be delivered by the customs administration
or other specified issuing agency of the exporting country (for example, chamber
of commerce) having its authenticity and regularity confirmed by the customs
administration.
The future trend is replacement of third-party C/O with self-declaration of
origin by manufacturers, exporters, or importers,37 making importing countries’
customs administrations more vulnerable to the
risk of error and forged origin information than “Growing RTAs create chal-
third-party C/O.  In addition, verification of lenges for customs through
authenticity and its contents entail sovereignty complex rules of origin
challenges because the parties issuing self- and by self-declaration of
declaration are located in foreign countries and origin.”
the importing country’s customs administration
does not have access to all necessary information and the authority to control
these foreign entities. Therefore, these RTAs stipulating self-declaration have
provisions for international cooperation between customs administrations,
among which are best efforts clauses. New technologies, such as blockchain, may
ensure the authenticity of the self-declaration, but they do not guarantee that the
contents are accurate, and verification of accuracy requires international cooper-
ation with foreign authorities (also see in Chapter 7).
For many customs administrations, this RoO function in export is a new role.
This also applies to their responsibility to advise companies established in the
country of any changes they may have to make in their supply chains and manu-
facturing processes if they wish their production to comply with the RoO laid
down by the RTA and to be eligible for preferential tariffs on imports in partner
countries.

36
EU candidate countries, for example, are scrutinized for the adequacy of customs external border
controls because they will be the external border of the European Union.
37
For example, the Japan-Australia Economic Partnership Agreement, the Association of Southeast
Asian Nations (ASEAN) Trade in Goods Agreement, and the Comprehensive and Progressive Agree-
ment for Trans-Pacific Partnership.

©International Monetary Fund. Not for Redistribution

56 Customs Matters: Strengthening Customs Administration in a Changing World

INVESTMENT POLICY (DUTY/TAX INCENTIVES)

Customs Administration and Inward Processing
In order to promote export-led growth and, according to the government’s invest-
ment promotion agencies, generate associated relatively well-paid employment,
among other things, many governments of both developed and developing coun-
tries are keen to attract foreign direct investment (FDI). FDI acts as a catalyst for
these countries’ integration into GVCs by providing not only foreign capital but
also technical, managerial, and marketing know-how. Traditionally, customs laws
provide for duty relief in connection with such investment, notably that for
inward processing, by exempting from import tariffs those imported raw materi-
als and intermediate inputs that are used in the manufacture of exports, thereby
facilitating economic activities.
Of course, the import duty exemption is conditional upon the export of the
products in which the imported inputs are embodied. If the export condition is
not met, the import duty is to be paid. If the duty-exempted goods are circulated
in the domestic market without paying duty, this constitutes customs fraud—
namely, misuse or diversion. To prevent and suppress such risk, customs admin-
istration monitors the import of raw materials and intermediate inputs, together
with the export, as well as the associated inventory under this regime. Such
monitoring involves an assessment of the “yield” (that is, how much raw materi-
als/intermediate inputs are used to produce a certain quantity of exports), which
has been agreed between the customs administration and the applicant, often in
consultation with an expert, the line ministry, an investment board, and so on.
Customs monitoring and control on inward processing are based on quantity and
not on value.
In some countries, manufacturers’ inward processing inventory data can be
electronically reported to the customs administration and compiled automatical-
ly, and in the case of exportation, the system automatically applies the “yield” and
adjusts the record accordingly. Hence, monitoring is automated. Control of
exempted goods is through desk audit and end-use verification at the site. Targets
for control should be carefully selected, applying risk management (as explained
in Chapter 5). Some countries also exempt capital goods, such as machinery and
equipment used to manufacture exports and, in a few cases, motor vehicles for
the use of employees. For these capital goods, an inventory is agreed with the
customs administration, and monitoring (or annual status declaration by the
applicant) and control are exercised by customs. Exemption of such capital goods
may be replaced with extendable import suspension.

Special Economic Zones

A recent phenomenon in investment promotion is the increased use of tax pref-
erences in addition to relief from customs duties. Tax preferences, which are
among the most prominent features of SEZs, include exemptions from other
indirect taxes (especially excises and VAT) and relief, if not exemption, from

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 57

direct taxes (corporate and personal income taxes and social welfare charges).38 In
addition, nontax incentives include loans with low interest rates, flexible condi-
tions to establish a company and regulation with regard to corporate management
board composition, relaxed regulations concerning remittances (including divi-
dends), simplified corporate reporting, flexible labor standards, and so on.
Consequently, in several developing countries, tax/duty preferences are no longer
stipulated in customs law or tax laws but are provided for in other laws (for exam-
ple, Investment Promotion Law, Special Economic Zone Law).
Different countries define SEZs differently. SEZs can cover free zones (FZs):
an FZ could be an independent customs territory, that is, a foreign territory under
the customs law and possibly in other laws too. FZ can set different tariff sched-
ules or become a duty/tax free zone. An FZ often has its own administrative
structure, including its own customs and customs laws. SEZs in developing coun-
tries may contain partially or entirely the features of an  FZ.39 Since one-stop
border posts (OSBPs) became popular at land borders—where two countries’
border authorities sit side by side in the same building—SEZs centered in OSBPs,
for example, cross-border economic zones (CBEZs), might emerge.40 SEZs are so
attractive to policy makers that, as seen in Chapter 1, the number of SEZs con-
tinues to increase. Nevertheless, there are failures where SEZs could not attract
investors or economic activities and job creation did not meet expectations.41
Besides SEZs, massive infrastructure projects, such as dam construction, high-
speed railway construction, and so on, are often granted tax/duty exemption for
certain imports for construction and its operation. Again, they are not stipulated
in customs law but in special laws or presidential decrees superseding customs
law. They may not be treated as a SEZ, but the features and challenges to customs
administration are almost identical.
The following paragraphs explain challenges associated with SEZs for customs
administration.42

Organizational Challenges. To manage SEZs, some countries create a special

government agency (instead of customs administration and tax administration),
such as an investment promotion board, an organization equipped with staff and
ICT systems. SEZ operators and SEZ users must then deal exclusively with such

38
Direct tax reduction/exemption linked to export is regarded as a prohibited export subsidy and
subject to counter measures, according to the WTO rules (applied to all the WTO members). Indi-
rect taxes preference is only within the zone; thus, when the goods exit the SEZ, indirect taxes gap,
including customs duties, shall be paid.
39
For example, until 2020, Jordan SEZ had its own customs administration (staff were rented from
Jordan customs) and own tax administration under its own laws.
40
For example, at a border zone between China and Mongolia.
41
Approximately 70 percent of SEZs in China were regarded as unsuccessful (Asian Development
Bank 2018). Some SEZs in India, Kazakhstan, and the Kyrgyz Republic are also assessed as failure,
yet there are no universally established criteria to assess success and failure of SEZs.
42
Also see WCO (2020).

©International Monetary Fund. Not for Redistribution

58 Customs Matters: Strengthening Customs Administration in a Changing World

an organization and not the customs administration. In certain countries, cus-

toms administration (and tax administration) may have neither any authority
over nor access to the SEZs.

Resource Challenges. In the past, the customs administration granted permission

to operate inward processing under the customs law, including, for example,
sustainability of business model, location (accessibility of customs officer), phys-
ical facility (wall, enclosure), and management responsibility. This permission
may have been postponed, rejected, or modified in considering the availability of
the necessary customs control staff.43 Under SEZs, customs administration may
not even be consulted by the responsible government agency (for example, line
ministry or investment promotion agency), which may not impose a requirement
to fence the entire facility. Scarce customs resources will undoubtedly become
increasingly stretched due to the proliferation of SEZs. End-use verification may
be similar to post-clearance audit, but the purpose of the visit and focus are
different.

Accountability Challenge. Government agencies promoting investment will ever

increase the number of SEZs and the SEZ users (firms operating in/under the
SEZ). In many countries, the fiscal impact of SEZs and its growth are not prop-
erly assessed in the budget bill, and the associated tax revenue forgone is often
ignored. It is often observed that a customs administration does not meet its
revenue target because of the significant size and growth of tax revenue forgone.
Forgone revenue could equal the amount actually collected by customs.
Important questions to consider are whether the investment promotion agency
estimates the increase in the number of SEZ and SEZ users; whether it (or the
Ministry of Finance) estimates the size of forgone revenue; whether the Ministry
of Finance (and customs and tax administrations) is consulted in the SEZ appli-
cation process (new SEZ, new users operating in/under SEZ); and whether they
can postpone/reject/impose conditions in granting approval. Monitoring and
evaluation of reliable data on the tax revenues forgone because of tax preferences
are the foundation for evidence-based policy making and public accountability.

Operational Challenges. Conditional tax/duty exemptions always run the risk of

diversion of goods into the domestic market without payment of duty/tax. The
key to success is that the customs administration (and the tax administration) has
authority to exercise as much control over goods imported into SEZs as it does
over ordinary imports. Formidable challenges arise if customs does not have such
authority or does have the authority but needs prior consent of the other govern-
ment agencies (for example, investment promotion board) in order to conduct a
control in each case.

43
In some countries, companies pay for any additional cost to customs administration for service.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 59

In addition, unlike traditional customs inward processing, certain countries

grant relief from much broader direct taxes, such as corporate income tax. If the
corporate tax rate is lower in the SEZ than in the
rest of the country, abusive/aggressive transfer “SEZs, getting relief and
pricing can happen within a country, enabling a exemption from customs
corporate entity operating inside and outside the duties and other taxes,
SEZ to shift profits into the SEZ from elsewhere need thorough monitor-
in the domestic economy, thereby evading taxes.
ing and control, and there
As customs usually controls the border between
the SEZ and the rest of the country, the customs should be strengthened
administration can and should help the tax cooperation with tax
administration to detect abusive/aggressive trans- administrations.”
fer pricing44 through, for example, exchanging
transaction data and high-risk profiles and exploring possible joint audits in
SEZs. Even in cases where the duty rate is zero, customs valuation and value
monitoring/control remain important to monitor intra-corporate trade activities
and combat possible abusive/aggressive transfer pricing. The latter can be avoid-
ed, if, as advised by the IMF, tax relief in SEZs is confined to tariffs and other
internal indirect taxes (or, as in some countries, related corporations cannot oper-
ate inside and outside the zone).
Trade statistics on goods in and through SEZs are not clearly harmonized
across countries. The customs administration should be aware that certain SEZs,
particularly those established in a transshipment port, may be used to camouflage
the origin of the goods imported and re-exported with little, if any, addition of
value or substantial process in order to avoid tariffs or other measures.45 Customs-
to-customs international cooperation may exist, but if the customs administra-
tion of the SEZ country does not have access and a mandate to manage the data
on activities in the SEZs, the customs administration of the importing country
needs to explore how to ensure the traceability of goods, for example, nonmanip-
ulated certificate issued by the SEZ authority (for the purpose of rules of origin,
RTA consignment criteria,46 and so on).
Finally, there are also nonfiscal risks, such as money laundering, illicit drug
smuggling, organized crime, terrorism, and intellectual property rights violations.
While these matters are beyond the scope of this book, they also highlight the

44
Provided that the country has a legal framework regulating profit shifting and transfer pricing.
45
This has been a persistent practice since the introduction of the GSP as well as bilateral trade tension
(bilateral trade imbalance disputes) since the 1970s. In order to be granted preferential market access
of GSP or RTA or to circumvent the protective quota or punitive duties, companies attempted to
change the goods’ origin by adding some value or processes, mostly not substantive processing, such
as cleaning, labeling, packaging, or dying in transshipped countries.
46
“Consignment criteria” are part of rules of origin, which are the criteria to assess whether the goods
maintain originating status for preferential tariff treatment while they are under transportation from
a party to the other party: for example, list of permissible process, requirement of nonmanipulation
certificate issued by transshipped countries, and so on.

©International Monetary Fund. Not for Redistribution

60 Customs Matters: Strengthening Customs Administration in a Changing World

importance of customs’ proactive authority and control of SEZs and activities

therein.

CUSTOMS VALUATION
Customs Valuation Rules
Before 1995, a customs administration could impose its determined value on the
imported goods. The Brussels Definition of Value (BVD) stipulated that a normal
market price is defined as “the price that a good would fetch in an open market
between a buyer and seller independent of each other” and countries compiled
paper books of market price of each product. The system was more like an “impo-
sition system” than a “declaration system.”47 Under this system, a list of market
prices for each product (by product, not commodity, and so much more detailed
than the tariff line) was ultimately important. Many countries that adopted BVD
compiled such data in paper folders, and in the 1990s an ICT database was devel-
oped called a minimum price database. Some companies were selling market price
data sets or services to customs administrations to check the market price in the
exporting countries, namely pre-shipment inspection for valuation purposes.
Today’s customs valuation rules, in contrast, are stipulated by the WTO
Customs Valuation Agreement (VAL),48 which entered into force in 1995, and
now all WTO members are obliged to follow it. The VAL stipulates that customs
valuation must be based on the actual price of the goods to be valued, except in
specified circumstances, which is generally shown on the international sales
invoice—thus, it is a “declaration system.” This price, plus adjustments for certain
elements that are also listed in VAL, equals the transaction value, which consti-
tutes the most important basis for valuation. When there is no transaction value
for the imported goods or when the declared transaction value is not acceptable
as the customs value because the price has been distorted as a result of certain
conditions, the VAL enumerates five other valuation methods (so there are now
six methods) to be applied in the prescribed hierarchical order (WTO [1994]):
(1) transaction value, (2) transaction value of identical goods, (3) transaction
value of similar goods, (4) deductive method, (5) computed method, and (6) fall-
back method. Most of the national customs laws have equivalent provisions,
largely duplicating key VAL provisions.

Customs Valuation Controls

As market price is no longer the basis of value, customs administrations must not
apply minimum prices to the customs valuation. The minimum price database

47
Some flexibility may have been applied, for example, 10 percent deviation from the market price
set by customs administration.
48
The official title is “Agreement on Implementation of Article VII of the General Agreement on
Tariffs and Trade 1994” constituting as an integral part of Marrakesh Agreement Establishing the
World Trade Organization (adopted in 1994, came into force in 1995).

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 61

was heavily criticized by some traders and academics because it lacks accountabil-
ity, is not updated, ignores technological and business model evolution, is a
nontariff barrier, and, most importantly, violates the WTO rules and is possibly
subject to the WTO dispute settlement (and possible retaliation). Although VAL
has been in force since 1995, customs administrations in developing and devel-
oped countries have faced problems administering this system.49 VAL has
imposed a huge burden on customs regarding how to justify its doubt as to the
truth or accuracy of the declared value. This includes the need to check the trade
sales invoice’s authenticity, contents, and consistency with the declaration; to
assess the relationship between the seller and the buyer; and to assess the adjust-
ments, such as lease, royalty, commission, and consultant fee, which need a pro-
found knowledge of international trade sales contracts. Some efforts by customs
administrations to cope with VAL and to support practices for customs valuation
are described in the following paragraphs.

Risk Management for Valuation Purpose. This is quite similar to the minimum
price database, but the customs value reference database can help customs admin-
istrations filter a combination of information—that is, detailed goods description
(tariff classification code), reference unit value, and exporting country or goods
origin—in the selectivity module in the customs clearance system. (Details are
presented in Chapter 5.) By this selectivity, if the declared unit value is lower than
the reference unit value (by a certain percentage), the declaration may be selected
for documentary check, and the customs administration may ask supplementary
questions or ask for supporting documents to assess which valuation method
should be applied. Commodities should be limited to those of high interest/high
risk, and the reference unit value should be regularly updated, preferably with
values validated by the customs administration in actual operations. Some com-
panies are selling market price data sets for this purpose. Another frequently
observed practice is that the customs administration analyzes its offense database
to profile risky goods or trading patterns for lower invoicing and the results are
reflected in updated selectivity criteria. This can be supplemented by trade data
mirror analysis which may provide indicative risk information.

Postclearance Audit. Postclearance audit (PCA) has two objectives for valuation
control: (1) to determine whether the selectivity criteria functions well (namely,
compliance measurement) and (2) to detect valuation irregularities. Often
random checking of the importation cleared through the green channel is applied
to (1), while targeting based on risk management is applied to (2). Proficient
knowledge of corporate books and accounting records, inventory records, and
ICT software are needed for an effective PCA approach. PCA is also discussed in
Chapters 4, 5, and 6.

49
The European Union claimed that potential losses of customs duties and VAT due to undervalu-
ation of imports of textiles and footwear from certain countries were calculated to be close to EUR
5.2 billion for the period 2013–16 (European Court of Auditors 2017).

©International Monetary Fund. Not for Redistribution

62 Customs Matters: Strengthening Customs Administration in a Changing World

Compliance Management. Traders’ compliance should be compiled and ana-

lyzed along with the information of sellers. Highly compliant traders face less or
little control (for example, random check described previously) so that voluntary
improvement in compliance can be motivated. Lowly compliant traders face
more severe controls, thereby making their transactions more costly to their busi-
ness partners than highly compliant traders. Thus, the market mechanism may
also promote highly compliant traders. Some countries allow highly compliant
traders to use a special sign (that can be used on business cards, webpages, com-
mercial ads, and so on) to distinguish them from the others in the market. A
similar concept is applied to highly compliant transporters or means of transport
carrying only highly compliant traders’ goods (for example, dedicated lanes at the
land border posts). Repeated fraud should result in increasingly severe penalties.
Also, for this reason, compliance records should be well maintained. In many
cases, traders are not compliant because the deterrent is not sufficient. There has
been anecdotal evidence that customs officers may promote noncompliance to
sustain their detection and thus penalty income; this malpractice should be elim-
inated. Chapter 6 addresses customs compliance programs in more detail.

Customs-to-Customs Cooperation. Valuation is the assessment of the interna-

tional trade sales contract between the foreign seller and the buyer (not between
the exporter and the importer; see Box 2.1). Accordingly, the foreign seller’s
information (including if the seller exists, if the seller engages in this trade trans-
action, the sales price [value], and the seller’s compliance) is very helpful. Some
countries may have legal constraints on the exchange of export value information,
while others may not. Certain countries may have difficulty in push-type data
exchange (where a whole data set is transferred), but pull-type data exchange
(specified information with certain justification) may be less onerous.50 In many
cases, bilateral/regional customs mutual assistance agreement (CMAA) 51 are help-
ful for such data exchanges. Anecdotal evidence indicates that such data exchange
does not need to occur in real time, but even a quarterly exchange by batch file is
sufficiently useful (in case of push type).

Customs–Bank Cooperation. International trade sales contracts can be seen as

third-party information. If the international trade sales contract is using an LC,
the commercial bank’s information, together with the transporter’s B/L and ship-
ping documents, is useful supporting evidence. A few countries have direct con-
tracts with commercial banks to obtain the B/L information containing the sales
value and payment information.

50
“Push-type data exchange” means that the sender sends the data that are pre-agreed between the
parties. “Pull-type data exchange” means that the sender sends particular data requested by the parties.
51
The Model CMAA is available on the WCO website. Weerth (2019) studied the number of CMAAs
concluded by certain countries: United States (75), European Union (72), Turkey (63), Canada
(42), Japan (19), India (12), United Arab Emirates and Argentina (11), Taiwan (8), South Africa (5).

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 63

SUMMARY
Customs revenue performance is determined by the trend of imports, among
other factors. Following the financial crisis in 2008, the average annual growth of
world trade has been generally slower than that of GDP. Trade liberalization and
slower growth in international trade have obvious implications for tariff revenues
collected by customs administrations. This downward impact on tariff revenues
can be offset or mitigated to the extent that reduced tariffs (trade liberalization)
and reduced trade transaction costs (trade facilitation) stimulate imports, which
in turn increases customs collection, including excises and VAT on imports.
Therefore, customs administrations should continue to explore measures facilitat-
ing imports while not compromising the level of compliance.
The environment surrounding customs and policies impacting customs are
evolving. RTAs and SEZs are not only liberalizing trade but also making trade
more complicated and increasing fraud risks. Increasing intra-firm trade, trade
between related parties, small/expedited shipments, and trade in secondhand
items and goods-and-intangible mixed all complicate customs valuation and the
collection of duty/taxes. The composition of customs collection will lower cus-
toms duties and increase excise and VAT on imports, which may have implica-
tions for compliance risk assessment and customs resource allocation. When the
environment evolves, customs administrations need to do the same.

REFERENCES
Acosta-Ormaechea, Santiago, and Atsuyoshi Morozumi. 2019. “The Value-Added Tax and
Growth: Design Matters.” IMF Working Paper WP/19/96, Washington, DC.
Acosta-Ormaechea, Santiago, Sergio Sola, and Jiae Yoo. 2018. “Tax Composition and Growth:
A Broad Cross-Country Perspective.” German Economic Review 20 (4): e70-e106.
Anson, José, Olivier Cadot, Antoni Estevadeordal, Jaime de Melo, Akiko Suwa-Eisenmann, and
Bolormaa Tumurchudur. 2005. “Rules of Origin in North-South Preferential Trading
Arrangements with an Application to  NAFTA.” Review of International Economics 13 (3):
501–517.
Asian Development Bank. 2018. “A Diagnostic Study of Kazakhstan’s Special Economic Zones
and Industrial Zones.” https://www.carecprogram.org/?publication=diagnostic- study
-kazakhstan-special-economic-zones-and-industrial-zones.
Brondolo, John, and Mark Konza. 2021. “Administering the Value-Added Tax on Imported
Digital Services and Low-Value Imported Goods.” IMF Technical Notes and Manual
2021/004, Washington, DC. https://www.imf.org/en/Publications/TNM/Issues/2021/05/21
/ Administering- the- Value- Added- Tax- on- Imported- Digital- Services- and-Low-Value
-Imported-Goods-50332.
Census and Statistics Department, Hong Kong Special Administrative Region. 2013. “Balance
of Payments International Investment Position and External Debt Statistics of Hong Kong -
Fourth Quarter 2012.” https://www.censtatd.gov.hk/en/data/stat_report/product/B1040001
/att/B10400012012QQ04B0100.pdf.
European Court of Auditors. 2017. “Import Procedures: Shortcomings in the Legal Framework
and an Ineffective Implementation Impact the Financial Interests of the EU.” Special Report
No. 19 of 2017. https://www.eca.europa.eu/Lists/ECADocuments/SR17_19/SR_CUSTOMS
_EN.pdf.

©International Monetary Fund. Not for Redistribution

64 Customs Matters: Strengthening Customs Administration in a Changing World

European Union (EU).  2017. “Council Directive (EU) 2017/2455 of 5 December  2017.
Official Journal of the European Union L 348/7. https://eur-lex.europa.eu/legal-content/EN
/TXT/PDF/?uri=CELEX:32017L2455&from=EN.
Gaspar, Vitor, Laura Jaramillo, and Philippe Wingender. 2016. “Tax Capacity and Growth: Is
There a Tipping Point?” IMF Working Paper WP/16/234, Washington, DC.
Gemmell, Norman, Kneller, Richard, and Sanz, Ismael. 2014. “The Growth Effects of Tax Rates
in the OECD.” The Canadian Journal of Economics, 47 (4): 1217–55.
Hillman, Jennifer. 2013. “Changing Climate for Carbon Taxes: Who’s Afraid of the WTO?”
Climate & Energy Paper Series 2013, The German Marshall Fund of the United States
Washington, DC.
Hollingshead, Ann. 2010. “The Implied Tax Revenue Loss from Trade Mispricing.” Global
Financial Integrity. http://www.financialtransparency.org/wp-content/uploads/2015/04
/implied-tax-revenue-loss-report_final.pdf.
Hutton, Eric. 2017. “The Revenue Administration–Gap Analysis Program: Model and
Methodology for Value-Added Tax Gap Estimation.” IMF FAD Technical Notes and Manual
17/04, Washington, DC. https://www.imf.org/en/Publications/TNM/Issues/2017/04/07/The
- Revenue- AdministrationGap- Analysis- Program- Model- and- Methodology- for-Value
-Added-Tax-Gap-44715.
Jensen, Lars. 2019. “The New Oligopoly of Container Shipping.” The Journal of Commerce
(July 4, 2019). https://www.joc.com/maritime-news/container-lines/new-oligopoly-container
-shipping_20190704.html.
Keen, Michael. 2007a. “VAT Attacks!” International Tax and Public Finance 14: 365–81.
Keen, Michael. 2007b. “VAT, Tariffs, and Withholding: Border Taxes and Informality in
Developing Countries.” IMF Working Paper WP/07/174, Washington, DC.
Keen, Michael. 2020. “The Keynote Presentation.” IMF/RMTF Webinar Series on the VAT,
Washington, DC. https://www.imf.org/en/Videos/view?vid=6198818506001.
Kokoli, Robert, Tadatsugu Matsudaira, and Fadia B. Sakr.  2021. “Customs Administration
Strategies for Improved Revenue Mobilization in METAC Countries.” Regional Notes,
IMF  METAC Washington, DC.  https://www.imfmetac.org/content/dam/METAC
/RegionalNotes/RN%204.pdf.
Lagarde, Christine. 2018.“Creating a Better Global Trade System.” IMF Blog, Washington,
DC. https://blogs.imf.org/2018/05/29/creating-a-better-global-trade-system/.
Organisation for Economic Co-operation and Development (OECD). 2002, “Business Benefits
of Trade Facilitation.” TD/TC/WP(2001)21/FINAL, Trade Directorate and Trade Committee
(April  10, 2002). https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf
/?cote=TD/TC/WP%282001%2921/FINAL&docLanguage=En.
Organisation for Economic Co-operation and Development (OECD).  2013. “Trade and
Intermediate Goods and International Supply Chains in  CEFTA.” CEFTA Issues Paper 6.
https://www.oecd.org/south-east-europe/programme/CEFTA%20 IP6_Trade%20in%20
Intermediate_Web%20and%20Print.pdf ).
Pomerleau, Shuting. 2021. “How Much Net Revenue Would a Border Adjustment Generate
Under a US Carbon Tax?” NISKANEN Center Blog. https://www.niskanencenter.
org/how-much-net-revenue-would-a-border-adjustment-generate-under-a-u-s-carbon-tax/.
PwC. 2021. “Value-Added Tax (VAT) Rates.” Worldwide Tax Summaries. https://taxsummaries
.pwc.com/quick-charts/value-added-tax-vat-rates.
Thackray, Mick, and Martina Alexova. 2017. “The Revenue Administration—Gap Analysis
Program: An Analytical Framework for Excise Duty Gap Estimation.” IMF FAD Technical
Notes and Manual 17/05. https://www.imf.org/en/Publications/TNM/Issues/2017/04
/20/ An- Analytical- Framework- for- Excise- Duty- Gap- Estimation- Excise-Gaps-in
-Tax-Administration-44720.
Weerth, Carsten. 2019. “Customs Mutual Assistance Agreements in the Light of Article 12
TFA—A Global Perspective.” Customs Scientific Journal 1: 79–96. http://csj.umsf
.in.ua/archive/2019/1/10.pdf.

©International Monetary Fund. Not for Redistribution

 Chapter 2 How Trade and Tax Policies Are Shaping Customs 65

World Bank. 2020. World Development Report. World Bank: Washington, DC. https://www
.worldbank.org/en/publication/wdr2020.
World Customs Organization (WCO).  2018a. “Cross-Border E-Commerce Framework of
Standards.” WCO, Brussels, Belgium. http://www.wcoomd.org/-/media/wco/public/global
/pdf/topics/facilitation/activities-and-programmes/ecommerce/wco-framework-of-standards
-on-crossborder-ecommerce_en.pdf?la=en.
World Customs Organization (WCO). 2018b. “Annual Report 2018–2019.” WCO, Brussels,
Belgium. http://www.wcoomd.org/-/media/wco/public/global/pdf/about-us/annual-reports
/annual-report-2018_2019.pdf.
World Customs Organization (WCO).  2020. “Practical Guidance on Free Zones.” WCO,
Brussels, Belgium. http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/facilitation
/activities-and-programmes/free-zone/wco-fz-guidance_en.pdf?la=en.
World Trade Organization (WTO). 1994. “Agreement on Implementation of Article VII of the
General Agreement on Tariffs and Trade 1994.” https://www.wto.org/english/docs_e/legal
_e/20-val_01_e.htm.
World Trade Organization (WTO). 2012. “Accession of Least Developed Countries - Decision
of 25 July 2012,” WT/L/508/Add.1.
World Trade Organization (WTO). 2019a. “Global Value Chain Development Report 2019 –
Technological Innovation, Supply Chain Trade, and Workers in a Globalized World.” https://
www.wto.org/english/res_e/booksp_e/gvc_dev_report_2019_e.pdf.
World Trade Organization (WTO).  2019b. “Report by the Secretariat  – Bangladesh.” Trade
Policy Review WT/TPR/S/385 (February  6, 2019). https://www.wto.org/english/tratop_e
/tpr_e/s385_e.pdf.
World Trade Organization (WTO). 2021. “Tariff Average.” Applied Duties and Trade (IDB),
Tariff Analysis Online. http://tao.wto.org/default.aspx.

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

 CHAPTER 3

Institutional and Professional

Foundations of Modern Customs
Administration
János Nagy and Hubert Duchesneau

This chapter provides guidance to customs policy makers and senior managers on
the institutional and professional foundations of modern customs administration.
It looks at the main challenges for those who are trying to ensure their adminis-
tration has the capabilities to meet the demands of the future.
The chapter is built on 10 key institutional and professional foundations of
modern customs administration: (1) sustained political commitment, customs lead-
ership, and ownership; (2) clear strategic direction; (3) result-oriented and measur-
able key performance indicators; (4) sound governance and accountability;
(5)  customs cooperative arrangements; (6) streamlined organizational structure;
(7)  institutional policy capability, enabling legal and regulatory framework, and
transparent procedures; (8) professional and skilled customs workforce; (9) coherent
integrity management framework; and (10) effective business continuity planning.

SUSTAINED POLITICAL COMMITMENT,

CUSTOMS LEADERSHIP, AND OWNERSHIP
Sustained Political Commitment
Sustained political commitment at the highest levels is a key element in the success
of customs modernization. Beyond endorsing the modernization strategy and secur-
ing the budget needed for implementing the planned reforms, the government’s role
is to support customs leadership in dealing with external constraints, vested inter-
ests, and resistance to change. The authorities should ensure that the customs mod-
ernization program is aligned to governmental policies, priorities, and decisions and
that the evolving regulatory environment does not conflict with customs modern-
ization objectives. For the many countries that are part of a regional trade agreement
(RTA), a large segment of the modernization program may come from the regional
commitments, which must, of course, be respected and implemented by members.
An example of such political support is in Barbados, where the prime minister
was interested in modernization and initiated a multiyear reform program in 2019.
The Barbados Customs and Excise Department (BCED) moved forward with an
aggressive reform agenda to mobilize revenue and facilitate trade in 2020. With the
strong political and financial support of the government, BCED addressed
67

©International Monetary Fund. Not for Redistribution

68 Customs Matters: Strengthening Customs Administration in a Changing World

fundamental flaws in terms of strategic direction, “It is vital to have agreement

governance, compliance, and policy framework in between customs and the
the first year of the reform. Measures to improve key
parent ministry on objec-
foundations such as organizational structure, strate-
gic planning, automation, revenue collection, per- tives and priorities, and vis-
formance management, client service, and internal ible support from the high-
audit were significantly advanced. The department est levels of government.”
modernized the 59-year-old legislative framework
and aligned it with the Caribbean Community and Common Market (CARICOM)
model to promote economic integration and facilitate trade in the Caribbean region.
Compliance programs such as post-clearance audit and trusted traders were created.
Key stakeholders noted substantive improvements in BCED’s approach and culture.
In some countries, the Ministry of Finance (MOF), the usual parent ministry,
tends to set revenue collection as the main priority and often pays less attention
to other aspects of customs’ mandate such as border protection, security, and
trade facilitation. Obtaining an understanding from all involved ministries (for
example, the Interior, Industry, Public Health, Agriculture, Transport, Public
Safety/Homeland Security) on the priorities for customs, having their support
and cooperation, and sharing a good framework on which to base operations and
reforms are important factors for success. An example of such inter-ministerial
cooperation is the development of electronic single-window solutions where cus-
toms is frequently dependent on the progress in other government agencies.

Customs Leadership and Ownership of the Modernization Program

Senior managers need to develop a compelling customs modernization vision and
a clear strategic direction prompting people to action. Modernization must be led
and promoted by senior management and broadly owned by all parts of the cus-
toms administration and have buy-in by the trading community and other stake-
holders. Notwithstanding the obligation imposed by the WTO Trade Facilitation
Agreement to inform and, where necessary, train stakeholders prior to the imple-
mentation of new requirements, programs, or projects, it is critical to consult
during the development of new plans with those partners and clients who have a
legitimate interest in customs reform efforts.
The trading community’s expectations and capacity are important considerations
in planning and undertaking customs reforms. In this respect, ensuring a level play-
ing field for all, the fair administration of rules and policies aligned with government
objectives, and the predictability and reliability of customs practices are important
elements. Generally, private sector stakeholders are interested in the following:
• Establishing and engaging in a productive system of consultation, in partic-
ular for preparation and implementation of larger customs reforms
• Having customs administration rules easily available to them in an under-
standable way
• Ensuring free and convenient access to customs procedures and administra-
tion, including border formalities, making fulfillment of their obligations
quick and easy

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 69

• Ensuring consistency across the whole customs administration in the appli-

cation of laws, regulations, and policies and having national service stan-
dards, professional customs staff, and a fair adjudication of appeals, thereby
making customs office “shopping” obsolete
• Lowering costs for government operations and for business compliance
through modernized techniques like paperless/fully automated and account/
system-based processing
• Simplifying and harmonizing procedures, including coordination among
government agencies for initiatives like single-window operations and pro-
viding meaningful benefits to compliant traders through trusted trader and
authorized operator programs
The modernization program needs to have reasonable objectives, be within an
approved and realistic budget, and be completed on time. A good implementa-
tion practice is to establish a dedicated reform team that can concentrate wholly
on the modernization agenda. Continuity of senior management is also import-
ant so that substantial and lasting changes have time to be implemented and to
take root in the organization’s culture. The modernization plan should be
reviewed periodically, remain flexible, and incorporate the emerging priorities
that will occur during a long-term plan.
Senior management needs to ensure that both internal and external commu-
nications are optimized to ensure buy-in by all stakeholders. Customs’ staff and
clientele should fully understand the objectives, the advantages, and the benefits
of the changes—and the disadvantages and costs of not proceeding with the
reforms. The key points for a successful customs reform and modernization based
on IMF experience are summarized in Box 3.1.

Box 3.1. Success Factors in Managing Customs Reform

and Modernization
• Securing political commitment from the highest levels of government from the
outset
• Having visible commitment and promotion of the reform from senior management
• Having a compelling vision and a clear strategic direction prompting people to action
• Establishing a dedicated customs reform and modernization management team with
the right mix of skills and levels (headquarters, field operations, enabling functions,
and technical experts)
• Engaging and consulting with stakeholders, including the private sector and other
government agencies (especially the Ministry of Finance/Revenue, Ministry of Interior
[police/gendarmerie], Ministry of Agriculture [veterinary/phytosanitary department],
Ministry of Health, Ministry of Trade, and so on)
• Gaining the understanding and acceptance of managers, employees, customers, and
stakeholders
• Developing reasonable objectives and a workable and funded implementation plan
with time-bound actions
• Having an internal and external communications strategy and adapting messages for
different audiences’ interests

Source: Authors.

©International Monetary Fund. Not for Redistribution

70 Customs Matters: Strengthening Customs Administration in a Changing World

CLEAR STRATEGIC DIRECTION

Strategic planning is a keystone of modern customs administrations as it aligns
programs to national fiscal, economic, social protection, and security objectives.
Effective planning ensures that the administration’s priorities consider opera-
tional realities, risks, and capabilities and provides for strong reporting and
accountability practices. It also requires an early and ongoing engagement of
staff members and stakeholders in the development and implementation of the
strategic plan.
The strategic plan informs subsequent corporate and operational planning,
policy development, and individual management and staff performance. The
strategic plan acts as a roadmap to guide the customs administration to fulfill its
vision and mission and contribute to government outcomes.
Strategy formulation typically includes analyzing the internal and external
environment in which customs operates to identify strategic issues and undertak-
ing a strengths, weaknesses, opportunities, and threats (SWOT) analyses; evalu-
ating the institutional risks and their probable consequences; developing or
updating the organization’s vision, mission, and values statements; and formulat-
ing concrete strategic priorities and objectives to address the identified issues.
These steps will then lead to the development of integrated business (for example,
operational, work, functional) plans.
The strategic planning process needs to be built on a thorough understanding
of the customs environment. It should begin with an environmental scan of exter-
nal factors and main trends and challenges, including stakeholders’ expectations,
all of which can potentially impact customs policies and programs. The main
external factors are the following:
• Political (for example, national fiscal, security and environmental policies)
• Economic (for example, fiscal situation, investment policies, trade, and
travel trends)
• Social (for example, demographic trends, levels of criminality and corruption,
compliance attitude of the public, social acceptance of customs controls)
• Technological (for example, degree of automation and ICT use, remote
work opportunities)
• Legal (for example, changes in legislative environment, privacy rights,
prosecution challenges)
The SWOT analysis identifies areas that the organization can build on to meet
future challenges and those areas that could be barriers to success. In assessing
institutional risks, the customs administration will identify the risks it faces over
the medium to long term that may impact its ability to carry out its core func-
tions. These include internal factors1 such as the following:

1
Chapter 5 discusses institutional and compliance risks in more detail.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 71

• Reputation (for example, credibility, integrity)

• Human resources (for example, sufficient number, skill levels, talent man-
agement)
• Infrastructure and material management (for example, adequate and safe
workplaces, proper tools and equipment)
• Legislative framework (for example, gaps, powers of the customs officers,
enforcement or compliance-based, transparency)
• Governance (for example, organizational structure, accountability structures)
• Finance (for example, availability of resources, strategic allocation, delega-
tion, expenditure management and controls)
• Information technology (for example, sustainable systems and equipment,
disaster recovery plans)
Taking into account all of the preceding factors is key when planning any
modernization or reform; otherwise, the chance of success will be diminished
from the outset. Information collected during this analysis raises the customs
administration’s awareness of what is working well and what isn’t. It opens up
avenues to address root causes of problematic issues.
For example, during the period 2015 to 2019, the government of Honduras
decided to transform the customs administration based on external and internal
factors, and although the process had some flaws and there are still improvements
to be made, the changes contributed to considerably strengthening the organiza-
tion’s foundations. These changes have allowed the customs administration to
enhance its performance as well as develop new capabilities to better adapt to
constantly evolving challenges. Among tangible outcomes achieved, goods’ release
times have decreased by 80 percent without compromising customs collection. In
addition, the customs administration was better able to face the challenges
imposed by the COVID-19 pandemic, which would have been much more com-
plicated if several of the reforms had not been undertaken.
Another example is the customs administration of Cambodia that was able to
host consultative meetings with participation of critical development partners at
regular five-year intervals. These meetings have been used successfully to articu-
late the strategic direction of the General Department of Customs & Excise and
obtain the required financial and technical assistance support for the implemen-
tation of the midterm reform programs.
A further example is Madagascar, where the minister of finance, demonstrat-
ing high-level political support, opened a roundtable event involving bilateral,
multilateral, and private sector development partners in 2020. The Malagasy
customs used this meeting to present its strategic plan and modernization pro-
gram requesting financial and technical assistance. At the conclusion of this event,
pledges covering 50 percent of the costs of the customs modernization program
were received.
In all successful cases, the initial focus has been on setting up reform coordi-
nation and project management functionality with a governance framework and

©International Monetary Fund. Not for Redistribution

72 Customs Matters: Strengthening Customs Administration in a Changing World

with later support coming in areas such as strategic management, legislation,

exemptions, valuation, risk management, intelligence, and post-clearance audit.
The results of the strategic assessment are used to define or validate the vision
for the organization. The vision creates a clear picture of what the leaders want
the customs administration to be in the future. It serves as a benchmark for eval-
uating long-term success. Coupled with the vision statement is a mission state-
ment that sets out the unique contribution that the customs administration can
make given its mandate. These two statements are typically joined by a definition
of key values that are principles that underpin the organizational culture.
It should be emphasized that more important than the vision and the mission
statements itself is the process of their formulation, which is an opportunity for
an open and intense internal dialogue for their elaboration within a customs
administration. Box 3.2 shows examples of two countries’ such statements.

Box 3.2. Two Country Examples of Customs’ Vision,

Mission, and Value Statements
Australia
Vision: to be a global leader in border law enforcement and trusted partner that helps build
a safe, secure and prosperous Australia.
Mission: to protect Australia’s border and enable legitimate travel and trade.
Values: integrity, professionalism, respect and accountability.

Bulgaria
Mission: To protect the society, the environment and the economy of the country and of
the European Union, to ensure the uniform application of the rules on the EU external
borders, to facilitate the international trade through smart and risk-based supervision on
the global supply chains, to be proactive and to work seamlessly with the interested par-
ties, to commit to innovations and sustainable development—this is the role of the
Bulgarian Customs Administration in the modern conditions of high degree of economic,
health and social insecurity.
Vision: To have a more efficient, more effective and modernized Bulgarian Customs
Administration, functioning in an increasingly integrated way with the EU customs author-
ities, with greater interoperability between the customs and other border information
systems; with sophisticated training system for customs officials.

Source: Authors.

Taking stock of the preceding examples, clear, “Customs leadership must

long-term strategic objectives are then established, articulate a clear and com-
covering a typical period of three to five years. pelling vision and set stra-
These objectives provide high-level outcomes (for
tegic objectives linked to
example, increased compliance) and have specific
milestones and indicators attached to them (for that vision.”
example, increased voluntary payments of duties
and taxes by 5 percent each year). The objectives are the basis for resource alloca-
tion and accountability and are supported by precise activities/projects that indi-
cate how success will be achieved.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 73

Strategic planning, or, in more general terms, the capacity building develop-
ment process, is a cyclical approach, which includes four phases: (1) need and gap
analysis/objective setting, (2) planning and implementation, (3) monitoring and
evaluation, and (4) feedback/update strategic approach.2 All phases of this cycle
are important, but phase 3, if reform is supported by international development
partners, takes on particular importance as the partners want to ensure they are
getting value for the money.

RESULT-ORIENTED AND MEASURABLE KEY

PERFORMANCE INDICATORS
Effective management requires that outputs and performance targets that are
articulated in plans be measured. The analysis and management of key perfor-
mance indicators (KPIs) will help the customs administration strengthen its core
processes and corporate functions. Experience shows that organizational effort is
directed to activities that are measured and away from those that are not. In other
words, “What gets measured gets done.” Rigorous management oversight and
accountability steer this process as attention is paid by the organization to the
priorities that management is monitoring.
Outputs and use of resources are measured at different levels of the organiza-
tion and for different purposes. At the organizational level, this is done to evalu-
ate achievement and outcomes against the strategic objectives and for external
reporting purposes. At the divisional or unit level, performance measurement
enables managers to react to demands (for example, percentage of workload
completed, processing times). At the individual level, this is done to evaluate staff
contribution and to set rewards and incentives through a performance appraisal
system.
Clear, result-oriented, and measurable KPIs should be determined for each
strategic objective that will allow for the assessment and reporting of progress on
a regular basis. Quantitative and qualitative measures are equally important.
Quantitative KPIs measure output volumes, such as number of shipments or
control actions. KPIs are also used to measure input and processes. Efficiency
KPIs capture the link between resources spent and results achieved; they aim to
measure the cost of delivering service. Qualitative KPIs reflect how well some-
thing was done, such as accuracy of answers to inquiries and client satisfaction
levels. Time-bound indicators are an important consideration for management to
ensure that activity or project milestones are met.
The starting point to use KPIs is with the fundamental customs responsibili-
ties such as clearance procedures. As a customs administration becomes increas-
ingly comfortable with using KPIs, the measures can move from having fewer and
simpler indicators to numerous and more sophisticated ones. Having a baseline

2
For more information on capacity building development cycle, see http://www.wcoomd.org
/-/media/wco/public/global/pdf/topics/capacity-building/overview/omd_cb_web_def_en.pdf?la=en.

©International Monetary Fund. Not for Redistribution

74 Customs Matters: Strengthening Customs Administration in a Changing World

of organizational performance against which ensuing periodic achievements are

assessed allows the customs administration and its stakeholders (including gov-
ernment) to validate progress.
The availability of accurate, reliable, and timely data to measure performance
is critical. Customs management will depend on such data to make decisions. It
is highly preferred that the data for most KPIs be available through an automated
system rather than through manual data collection processes, which are more
subject to human frailties. The organization also needs the analytical capability to
assess variances, trends, and emerging issues. Some countries lack the appropriate
data and analytical base to do this fully, but incremental steps can be taken.
The customs administration should have a culture of managing performance
through KPIs in order to know where it is relative to its objectives and strategic
direction. This culture of measuring and managing performance is led by senior
management. Part of this process is to provide feedback so that performance can
be changed to achieve the desired results. To have practical and relevant change,
feedback must be combined with consequences. Appendix A provides examples
of key performance indicators related to revenue collection, customs clearance,
risk management and compliance, enforcement, and human resource manage-
ment. Chapter 6 provides further examples specifically related to the enforcement
function.

Performance Reporting
Performance reporting is designed to clearly and accurately explain the extent to
which the administration’s strategic objectives were achieved and at what cost.
Customs administrations typically have internal and external performance report-
ing such as monthly operational activity reports and annual performance reports
to government respectively.
The frequency of internal monitoring and the management of those results
depend on the business activity, the availability of reliable and timely data, and
the importance to the organization. A good practice is to monitor and report
performance against operational plans monthly, at least for the last nine months
of the fiscal year, so that management can assess progress, identify significant
variances, and take corrective action if necessary. Management will be interested
in not only the current outputs but how they compare to previous time periods.
This trend analysis helps management decide if action is required.
Performance reports to governments should set the customs operating context
and be linked to overall government priorities. In presenting accurate perfor-
mance information from the customs administration, a focus should be on the
benefits for citizens and traders.

Performance Management
While reporting of strategic and divisional performance is done through the pre-
viously noted process, the measurement of individual performance is done
through the staff appraisal process. This is a process that provides all staff within

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 75

the organization with clear direction (objectives) on what is expected from them,
assesses the results of their work, and gives timely feedback.
Staff appraisal management ensures that staff and managers get the coaching
and learning opportunities they need to continually improve their performance.
It is conducted both formally and informally. The formal performance manage-
ment process is time-specific and typically in three steps conducted bilaterally: at
the beginning of the year, when performance expectations are established; at
midyear, when performance is reviewed; and at year-end, when performance is
assessed. It is complemented by an ongoing process in which constructive feed-
back is given frequently, often after a particular event (such as a team meeting),
after a file has been submitted, or when a project is completed.

SOUND GOVERNANCE AND ACCOUNTABILITY

Both external and internal governance aspects are critical in achieving greater
alignment to government policies, better performance including more efficient
use of resources, transparency, and accountability. “Institutional Policy Capability,
Enabling Legal and Regulatory Framework, and Transparent Procedures” deals
with the place of customs in government and the organization structure related
considerations.
The external dimension of governance arises from outside the administration
(for example, the institutional environment within which an administration oper-
ates). A prominent role is played by the supervising ministry and the external
oversight of the administration by the legislature or other agencies (for example,
Court of Auditors). The internal aspects of governance include, for example, the
head of the administration and the internal management approaches, structures,
and systems as well as the processes. It is both the internal and external dimen-
sions that together provide a complete view of the institutional governance of the
administration.
A sound internal governance framework facilitates managerial oversight and
accountability. Governance supports the strategic management of customs prior-
ities; enables the consideration of issues at the right level; and ensures that deci-
sions are transparent and communicated. A governance structure includes all
layers of management. It typically comprises committees having responsibility for
a distinct area (for example, overall corporate management led by the senior exec-
utive team, enforcement issues led by a direct report to the head of the customs
administration, human resources issues led by the head of this function). Each
committee has a Terms of Reference (ToR) defining the place of the committee
in the overall governance structure, the mandate, the membership, its decision-
making authorities, the frequency of their meetings, and housekeeping matters.
Committee members include managers having at least some responsibility linked
to the area covered by the committee and may be supported by a network of
experts. Sharing decision making among managers in a governance structure
increases the culture of stewardship across the organization and minimizes the
monopolization of information and the concentration of decision making at

©International Monetary Fund. Not for Redistribution

76 Customs Matters: Strengthening Customs Administration in a Changing World

unnecessarily high levels. The governance structure for the organization would be
approved by the senior management team.
Larger organizations will typically have a suite of committees ranging from
management teams’ regular meetings that occur at all levels of the organization to
operational, policy, and functional (for example, human resources, IT, budget,
internal audit) committees at and/or below the level of the head of customs.
Smaller administrations also have management team meetings throughout the
organization and may consolidate the discussions on operational, policy, and
functional matters into fewer fora as may meet their needs.

CUSTOMS COOPERATIVE ARRANGEMENTS

Coordinated Border Management
Cooperation of government agencies, internation- “Good practice is to have
al, and private-sector collaboration are fundamen- only the minimum num-
tal to effective border management. Effective ber of government agen-
relationships with key national regulatory author-
cies present at the border
ities who also have an interest in the border (for
example, public health, safety, veterinary, phy- to control the goods.”
tosanitary, intellectual property, technical stan-
dards, environment protection) are critical to deliver efficient and effective ser-
vices. Often the authority, knowledge, and skills required to effectively manage
border issues are spread across several national agencies or departments, requiring
mutual cooperation as part of a coordinated border management approach.
Parallel operations of too many OGAs at the border checkpoints/points of
entry make the overall processing of cargo cumbersome, creating unnecessary
delays in the flow of goods across borders and extra costs to both traders and
government. Creating all necessary conditions for border controls by all OGAs at
each border crossing can be very expensive; therefore, the importation of certain
groups of commodities that are subject to specific controls (for example, live
animals and food) can be restricted to a limited number of border crossings,
where practical. Border controls under the main responsibility of various OGAs
are best organized around customs control in a harmonized way, limiting inter-
ventions to only those controls that are indispensable at the border and for which
inland checks later could create irreparable and excessive harm. Matters of nation-
al security, public health, and contraband interdiction are prime examples.
Bi- and multilateral agreements between and among such OGAs, harmonizing
and streamlining the respective rules and standards, facilitate the management of
border controls on their behalf by customs. Electronic information from OGAs
(for example, certificates) and use of a single-window platform facilitate the pro-
cessing of restricted and controlled goods at the border. International standards
are also helpful in finding a solution to meet national needs (IMO Convention
on Facilitation of International Maritime Traffic, London 1965; UN International

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 77

Convention on the Harmonization of Frontier Control of Goods 1982; WCO

SAFE Framework of Standards 2021).
One specific objective of cooperation with other government agencies is to
limit the number of control agencies operating at the borders to the minimum
necessary, ideally only to passport and customs control authorities present. This
will ensure the minimum cost and delay at the borders and reduce opportunities
for abusing official powers.3 Best practice allows customs to perform at least the
necessary basic border checks on behalf of OGAs based on cooperation and infor-
mation provided to customs by those agencies. The relevant multilateral interna-
tional agreements provide the necessary standards for such arrangements. They
include the 1982 United Nations International Convention on the Harmonization
of Frontier Control of Goods (land-border controls) and the International
Maritime Organization’s Convention on Facilitation of International Maritime
Traffic, London, 1965 as amended.
In situations where an electronic single window for trade is being implemented,
the application of risk management is expanded to include OGAs involved in the
regulation and control of international trade. This requires a much broader, inter-
agency approach to risk management, led by the customs administration. Though
in some countries other single-window solutions exist (for example, organized
around the operations of the transport industry), it is important that a single-
window system involving all OGAs that play a role in the border controls of goods
is developed under the leadership of customs, built around customs controls, and
integrated or connected to the customs system to enable interoperability.

Customs and Tax Cooperation

Even though customs and tax administrations have different competencies, there
is plenty of common ground and a clear need for close cooperation between the
two. While tax administrations oversee internal revenue, customs administrations
are responsible for the collection of duties and taxes levied on international trade
transactions. In addition, customs is responsible for monitoring and controlling
international trade transactions and all the support infrastructure that entails,
including the facilitation of trade, detection of smuggling, and border protection.
To improve the effectiveness of both operations and better achieve their respective
objectives, tax and customs administrations need to cooperate and exchange
information. However, successful cooperation requires mutual trust and respect,
and all too often a breach of that mutual trust and respect can lead to difficulties

3
An example of such streamlined border clearance is Cambodia, where the number of regulatory
agencies stationed at the border was reduced over time from more than 10 to two (customs and
immigration). This government decision required regulatory agencies to establish cooperative working
arrangements and brought about a reduction in overall regulatory requirements and clearance times.
An inter-ministerial Risk Management Committee oversees the development and application of risk
management.

©International Monetary Fund. Not for Redistribution

78 Customs Matters: Strengthening Customs Administration in a Changing World

for both agencies when addressing common compliance issues. Some countries
have attempted to address this problem by implementing memoranda of under-
standing (MOUs) between customs and tax authorities to establish clear lines of
communications and set out procedures for inter-agency cooperation and the
sharing of sensitive taxpayer information.
There are significant benefits to an enhanced customs–tax cooperation,
including increased tax compliance and revenue, more efficient collection of
duties and taxes, and even the ability of better addressing risks that may be linked
to organized crime activities (arms, drugs, money laundering, intellectual proper-
ty rights, and public security).4 For example, taxpayer information is essential to
help address several revenue and security risks through the customs risk assess-
ment process. Cooperation in the form of reciprocal exchange of information,
shared risk management data, and close collaboration in post-clearance auditing
enhance overall compliance and revenue mobilization for both administrations.
Although Chapter 6 deals primarily with the advantages of customs and tax coop-
eration for revenue collection and enforcement, this issue is also referenced else-
where throughout the book.
Thirty-six percent of those countries that pro- “Government should care-
vided data to the ISORA5 survey (out of a total of fully consider its long-
135) have integrated their tax and customs admin-
term priorities and policy
istrations.6 Integration under a revenue authority
can benefit both administrations in better fulfill- strategy before integrat-
ing their mandates through shared and mutual ing its customs and tax
support units (that is, legal, management, ICT, administrations.”
and certain auditing activities) and better infor-
mation exchange while maintaining their core businesses separate and focused on
their mandates. The Spanish Revenue Agency, AEAT, is a good example of this.
It was created to go beyond a simple exchange of information and instead facili-
tates the sharing of access to systems and databases between those tax and customs
units that require key information to fulfill their functions and tasks—albeit
following strict security rules and regulations. In addition, common plans are
designed to improve taxpayers’/operators’ compliance. However, in some coun-
tries integration has not necessarily resulted in noticeably improved customs
operations. This could be attributed to the fact that the integration might have
sought primarily to reduce spending on tax and customs administration opera-
tions and achieve economies of scale through the merging of common support

4
See also the WCO Guidelines on Customs-Tax Cooperation at http://www.wcoomd.org/en/topics
/facilitation/instrument-and-tools/tools/guidelines-on-customs-tax-cooperation.aspx.
5
International Survey of Revenue Administrations (ISORA) conducted by the IMF, the Inter-
American Center of Tax Administrations (CIAT), the Intra-European Organization of Tax Adminis-
trations (IOTA), and OECD.
6
Some countries, particularly in Latin America (Argentina, Brazil, and Peru), have chosen to also
integrate within their revenue authorities the management and enforcement of social security con-
tributions, thus achieving a more comprehensive perspective for improving taxpayer compliance.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 79

functions while core tax and customs processes that required improvement
remained largely unchanged.
In the end, regardless of whether they are integrated, tax and customs admin-
istrations must develop effective mechanisms for cooperation and information
exchange and promote specific initiatives aimed at improving services and com-
pliance. Effective tax–customs controls require a comprehensive understanding of
the taxpayers/operators, which is only possible through close and continuous
cooperation. Both administrations must establish coordinated goals and imple-
ment strategic initiatives such as the following:
• A unique, up-to-date, and reliable tax identification number for customs
transactions
• Timely and efficient electronic cross-validation between customs declara-
tions and basic tax obligations
• An exchange of electronic information on taxpayer/operator records to
assess levels of compliance and to define strategies for their own respective
business purposes.7 This initiative should result in the development and
utilization of a taxpayer profile for risk assessment purposes in both tax and
customs compliance.
• Complementary strategies to monitor and control exemptions and special
regimes
• Comprehensive and coordinated VAT and excise management and compli-
ance programs
• Complementary strategies to monitor and control imports and exports of
extractive industries (oil and derivatives, gas, gold, diamonds, copper, and
so on)
• Provision of services to each other in selected areas having comparative
advantage such as debt collection, specialized training and exchange of expe-
rience, consultancy
• Joint activities may be practical and more effective (for example, certain
onsite audits)
This kind of information sharing between the two organizations has already
been implemented in a number of countries and, when done in support of well-
defined service and compliance programs, has resulted in better compliance
management for both areas. In the absence of this information sharing, however,
tax and customs administrations would continue working half-blind and any goal
of improving compliance would be much more difficult to achieve. Appendix B
provides additional context on the matter of integrating tax and customs.

7
It is important to clearly define what data are required from each administration, how it will be used,
how it will be handled, and how confidentiality will be ensured.

©International Monetary Fund. Not for Redistribution

80 Customs Matters: Strengthening Customs Administration in a Changing World

Customs–Private Sector Engagement

Governments, the private sector, and both national and international organiza-
tions including the WTO and the WCO recognize the value of and encourage
meaningful and sustainable engagement with the private sector. The WTO Trade
Facilitation Agreement (TFA) provides for regular consultations with the private
sector and for having a national committee on trade facilitation (NCTF). It also
recommends that the private sector be provided with opportunities to comment
on legislative and regulatory proposals and to be informed in advance before such
changes come into effect. Finally, the TFA provides trade facilitation measures for
the authorized operator. More information about the TFA and its implications for
customs can be found in Chapter 4.
The WCO revised Arusha Declaration on Integrity in Customs promotes an
open, transparent, and productive relationship with the private sector to address
corruption and promote customs integrity. The WCO and the IMF have also
noted that the response to COVID-19 has highlighted the importance of
strengthened relationships with the private sector to support the business conti-
nuity of the national economy and international trade.
The WCO Private Sector Consultative Group (PSCG) is an example of valu-
able and fruitful collaboration and partnership between customs and the private
sector. The PSCG informs and advises the WCO and its members on customs
and international trade matters from the private sector’s perspective. The PSCG
argues that the customs administration’s commitment to engagement with the
private sector as well as to transparency, predictability, and efficiency is a strong
foundation for success.
Most customs administrations, at headquarters and through regional or local
offices, engage with private-sector stakeholders (particularly importers, brokers,
couriers, exporters, carriers, airport and seaport authorities, industry associations,
and wider national regulatory agencies) in many ways. For instance, formal con-
sultative committee structures are used to share information, raise awareness of
issues, and discuss important strategic questions such as policy issues and legislative
amendments. Working groups and subcommittees typically seek input and feed-
back from stakeholders and find solutions to technical or process-related problems.
Chapter 4 discusses in more detail the principles of stakeholder engagement.

Customs-to-Customs International Cooperation

Customs administrations should not limit their reach to partner government
agencies and economic operators within their country’s borders. Cross-border
trade requires customs to have a proactive approach to issues that originate or end
beyond such borders, and the first, basic step is to engage with counterparts,
particularly those from neighboring countries and trade partners. Customs
administrations benefit greatly from robust and reciprocal cooperation programs
and mechanisms designed to enforce their laws, increase compliance, facilitate
trade (including through the simplification and harmonization of procedures and
joint or coordinated customs inspections), share best practices, and receive/

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 81

provide technical assistance or training in those areas that can or should be

improved. For these purposes, negotiating and implementing bilateral or multi-
lateral agreements is the best way to build a foundation for an effective two-way
cooperation. The more solid the agreements, the stronger such cooperation
can be.
The most common type of a customs cooperation agreement between two
customs administrations is a Customs Mutual Assistance Agreement (CMAA).
The CMAA provides a formal conduit for the exchange of information for
enforcement purposes, although most of them also include specific provisions for
cooperation in trade facilitation and technical assistance matters. Most of the
CMAAs allow for the exchange of information on a case-by-case basis. However,
in recent years some customs administrations have agreed to expand the scope of
their agreements to allow for the exchange of bulk data. Also, some bilateral trade
agreements contain provisions for customs cooperation on the aforementioned
matters while others refer such cooperation to a CMAA or other equivalent
agreement.
Multilateral agreements on customs cooperation, either customs-specific or
those included in multilateral trade agreements, contain provisions on the same
matters as bilateral agreements, some of them with an equal force, while others
simply encourage the parties to cooperate.
Also, there are customs cooperation agreements between member countries of
a customs union as well as agreements between individual countries and a block
of countries or a customs union. Such is the case of several agreements signed by
the European Union8 with Korea, Canada, Hong Kong, United States, India,
China, and Japan. The European Union also has Partnership and Co-operation
Agreements with a number of countries, including Russia and Ukraine, which
cover customs cooperation and include a protocol on mutual administrative
assistance.
Nevertheless, although most customs administrations have signed cooperation
agreements, often the biggest challenge is not having them in place but putting
them into practice. It is common to see that these agreements are underused,
because of either a lack of political will or a clear cooperation strategy. Other
factors that delay cooperation between customs administrations or make difficult
the implementation of these agreements include significant gaps between the
parties, potential vulnerabilities in data protection, agreement management
(including governance and oversight), different priorities, and courts that have
not been familiarized with investigation cases conducted under the agreement.
Therefore, when negotiating a customs cooperation agreement, it is essential to
consider the aforementioned aspects as they will come into play when the agree-
ment enters into force. Otherwise a tool intended to strengthen the signing cus-
toms administrations’ capacities will be underused.

8
For more information on the EU customs cooperation arrangement, see https://ec.europa.eu/taxation
_customs/international-customs-co-operation-and-mutual-administrative-assistance-agreements_en.

©International Monetary Fund. Not for Redistribution

82 Customs Matters: Strengthening Customs Administration in a Changing World

A good example of strengthened customs cooperation between a developed

economy and an emerging one is that between Mexico and the United States, two
neighboring customs administrations at different development levels but with com-
mon interests in protecting their trade agreement and their borders and populations.
Another common critical interest is the need to process the high traffic volumes at
the border, including that of their bilateral trade. On a daily basis, 1.2 million peo-
ple, 18,260 cargo trucks—including loaded rail containers—and 367,000 personal
vehicle passengers cross the common border through 42 border crossing points (US
Department of Transportation 2019). In 2019, their bilateral trade in goods
amounted to $612 billion (United States Census Bureau 2019), where more than
90 percent of it moved from one country to the other on cargo trucks or by rail.
The 1994 North American Free Trade Agreement (NAFTA) forced both cus-
toms administrations to strengthen their cooperation and bring it to a higher
level. In 2000, both customs administrations had expanded the scope of their
CMAA (US Department of State, 2000),9 and through the years, these customs
administrations have been capable of developing and implementing numerous
cooperation programs and mechanisms, including mechanisms for an automated
customs data exchange pertaining to transactions in all modes of transportation—
some of such exchange in real time—harmonization of electronic cargo manifests,
joint customs inspections at shared facilities in 13 ports of entry (Unified Cargo
Processing), secure and dedicated lanes for Authorized Economic Operators at six
large ports of entry, coordinated approaches to risk management and targeting—
including deployment of risk analysts at their targeting centers—joint investiga-
tions and enforcement task forces through a Trade Transparency Unit, and busi-
ness resumption protocols to address natural disasters. Mexico Customs embarked
on a strong modernization process in the early 1990s, which allowed it to auto-
mate all its processes and conduct its operations based on risk management.
Regardless of the gaps in economic development between Mexico and the United
States, their customs administrations have proven that it is possible to build and
benefit from a strong and well-planned cooperation.

STREAMLINED ORGANIZATIONAL STRUCTURE

A modern customs administration needs an efficient organizational structure
capable of delivering the required results effectively and within the resources
allocated. The structure cascades from the administration’s mission, vision, and
strategic priorities. As an administration’s enabler, the structure should support
core customs processes, emphasize customer service, and minimize overhead. The
organizational structure will take into account the country-specific priorities and
geography, the economic and security needs of the citizens being served, and the
national public administration culture. Box 3.3 outlines some key principles to
consider in designing an organizational structure for customs.

9
https://2009-2017.state.gov/s/l/treaty/tias/2000/126772.htm.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 83

Box 3.3. Key Principles of an Effective and Efficient Customs

Administration Organizational Structure
• Clear separation of functions, roles, and responsibilities between headquarters
(design of policy and procedures, setting of standards, planning and monitoring) and
field operations (execution)
• Streamlined decision making built on minimal management layers, with appropriate
spans of control and internal controls
• A focus on strategic priorities, functional lines, and core customs processes
• Customer service orientation
• Scalability and flexibility to expand the operating model to cover additional services,
processes, and trade volumes

Source: Authors.

Customs within the Government Apparatus

Good practice provides for a customs administration that is established with
independence from political direction. The location of the customs administra-
tion within government is based on the public administration culture, impor-
tance of its fiscal role, and current government strategies and policies. There are
three main options: (1) customs fully integrated into the parent ministry (often
Finance) structure, (2) autonomous/semi-autonomous customs agency, and (3)
customs integrated with tax into a revenue authority or other service like passport
control/border security agency. These two latter structures are still normally
supervised by the minister/Ministry of Finance directly or through the interme-
diary of an independent board.10
The main advantages of full integration into the Ministry of Finance are that it
provides the minister, who is responsible for budgetary revenue, with full control
over an important revenue-collecting administration and can more easily ensure a
coordinated supervision with tax policy and the administrations enforcing those
policies. In some countries, such a close supervision from a cabinet minister may
allow direct political influence in the daily management of customs administration,
undermining public trust in the independent administration of customs matters.
In a few instances, regional or state governments benefit from customs revenue
directly and have a say in supervising customs administrations, including in
selecting regional managers. However, this is not in line with good international
practice. A national administration (that is supervised by the central government/
minister of Finance) is the most effective way of collecting revenue for both
regional/local and central governments. Financial resource needs of regional and
local governments should be met through redistribution of revenue by central
governments according to a formula agreed and guaranteed by law. On the other

10
According to the WCO 2019–20 annual report, there were 55 separate or semi-autonomous cus-
toms agencies (30.1 percent), 72 administrations integrated into ministry structures, and three border
protection services (1.6 percent), in addition to the 53 combinations of tax and customs in revenue
authorities (29 percent).

©International Monetary Fund. Not for Redistribution

84 Customs Matters: Strengthening Customs Administration in a Changing World

hand, this principle does not negate the need for regional and local customs offices
to coordinate activities and to cooperate with regional and local governments.
In some countries (Australia, Canada, United States, New Zealand, and some-
what the United Kingdom), customs is partly or fully integrated into a single
border control agency. This was done in line with emerging government priorities
and the changing balance of customs administration mandates.

Functional Direction and Management

Many customs administrations operate under a functional model. Functional
direction can be defined as guidance that cuts across the vertical lines of authority
in an organization. This would be, for instance, policy or procedural guidance
provided by headquarters (HQ) to frontline (field) operations or direction by one
branch or division to another. Functional management links program perfor-
mance to resource allocation and program expenditures. HQ functional areas set
direction and performance objectives for regional or local operational offices and
assign the appropriate amount of resources to achieve these objectives (budget,
full-time-equivalent resources, training, equipment, and so on). In turn, field
operations are expected to deliver on the objectives set, manage and report on
operational performance to the functional areas, and use discretionary authority
to adjust allocated resource levels responsibly to meet local emergent risks.
Strong functional direction and management are instrumental where field
operations are substantial; frontline officers’ exercise of powers has considerable
discretion; and operating circumstances vary widely across regions, offices, and
functions. Chapter 6 provides an outline of a headquarters functional organiza-
tion of customs enforcement.
Three requirements to ensure smooth operations under this model are the
following:
• The roles and responsibilities of both frontline and HQ functional manage-
ment must be clearly defined.
• Effective communication and cooperation must be maintained between
frontline and HQ functional units at all levels. Frontline managers and staff
must know what direction is being received from the functional areas, while
functional managers must get feedback from the front line if they are to
ensure that policies fit the operational reality.
• Customs senior management must hold both operational and functional
managers accountable for their respective responsibilities.

Headquarters and Field Operations Roles

Headquarters
Modern customs administrations should have a strong HQ function providing
oversight and ensuring uniform operations across the field network. The prime
responsibility of HQ is the development and oversight of nationally consistent
policies, procedures, and performance criteria that are effective in achieving

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 85

customs’ outcomes. HQ is not involved in day-to- “Clear separation of head-

day operational issues, which are the responsibility quarters and field functions
of customs regional and local office managers. In is key to ensure effective
customs administrations that are compact, it may
operational performance.”
be more difficult to separate HQ and field respon-
sibilities, but HQ involvement in day-to-day
decision making should be limited to the extent feasible.
HQ should also be responsible for the implementation of international and
regional agreements and interaction with bodies like the WTO and the WCO. HQ
is to ensure that legislation, regulations, and procedures are up to date, in com-
pliance with a country’s policies, and applied uniformly by each customs office.
In addition, HQ should interact with policy makers, in the ministry responsible
for customs or others as may be appropriate, to agree on such matters as revenue
targets and to provide input on the administrative impact of proposed policy
options.

Field Operations
Field operations implement operational policies identified for regional and local
structures. They are accountable for border clearance, revenue collection, enforce-
ment measures, and investigations.
A good practice is to have a field liaison function or coordination office at HQ
with a corresponding contact in the regions. This relationship can clarify opera-
tional direction and guidance to the regions, which helps ensure national consis-
tency and also is a forum for the regions to present issues to HQ for consideration
when developing policies and procedures.

Corporate Functions
A modern customs administration requires professional support services to devel-
op policies and deliver programs aligned with government priorities; to draft
legislation and provide legal interpretation and advice on policies and procedures;
to oversee and participate in the negotiation and implementation of international
agreements; and to provide guidance and support for people and financial man-
agement, personal and physical security, procurement, material and information
management, real property, communication, and ICT solutions.
In addition, it is good practice to have internal affairs, internal audit, and
program evaluation reporting directly to the head of the customs administration.
Internal affairs should ensure compliance with all security activities and integrity/
professional standards. Internal audit and program evaluation should be respon-
sible for reviewing operational, administrative, and financial systems and process-
es, monitoring compliance with management policies and priorities, assessing
effectiveness and efficiency, and providing advice on improvements and how to
address issues.
Some corporate functions such as public and media relations, communica-
tions, legal affairs, international affairs, and reform and modernization could also
report to the head of customs or to a deputy head.

©International Monetary Fund. Not for Redistribution

86 Customs Matters: Strengthening Customs Administration in a Changing World

Appendix C presents some ideas on organizational design for a customs admin-

istration. This is presented to identify the key components of a typical organization
structure and needs to be adapted to each administration’s national context.

INSTITUTIONAL POLICY CAPABILITY, ENABLING

LEGAL AND REGULATORY FRAMEWORK, AND
TRANSPARENT PROCEDURES
Customs Role in Policy
Converting government’s strategic requirements into action requires policy and
program development. Often a neglected function in customs administrations,
analytical and policy capability is critical to sustainable success. A good example in
translating government’s strategic requirements into customs programs is the imple-
mentation of the WTO TFA measures of efficiency and predictability and building
appropriate compliance programs to mitigate the risks. In that context, customs
administrations are developing risk management, single-window, advance rulings,
authorized economic operators (AEOs), and post-clearance audit programs for their
countries.

Enabling Legal and Regulatory Framework

A modern customs administration requires a clear policy, legal, and regulatory
framework aligned with national legislation; bilateral, regional, and multilateral
agreements; and international standards, such as the WCO Revised Kyoto
Convention on the Simplification and Harmonization of Customs Procedures
and the WTO  TFA.  The legislative instruments include the customs law that
requires the approval of the national congress or parliament and the regulations
that do not require submission to these bodies. Regulations are therefore more
easily updated to reflect current needs. This framework should be supported by
transparent and predictable customs procedures.
Customs needs clear and comprehensive legislation that does the following:
• Delineates the competencies of the customs administration
• Identifies responsibilities of the customs administration and the collaborat-
ing other government agencies
• Provides guidance, rules of procedure, and empowerment to adequately
promote compliance and implement and enforce the provisions of law
• Complies with obligations from international treaties and agreements and
good international standards
The customs administration often plays an important role in developing the
legislation and regulations, while the parent ministry leads the work by providing
guidance and taking the draft instruments further to government (cabinet) for
approval and to parliament for adoption when required. This reflects their respec-
tive roles, with the ministry responsible for identifying high-level policies for
customs administration and customs responsible for implementation.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 87

In preparing new legislation, it is important to consult with stakeholders early

in the process and to ensure sufficient time before government and parliamentary
review so that customs, the trading community, OGAs, and any other interested
parties can provide input and prepare for implementation. This preparation fre-
quently includes developing changes to automated systems and training both
customs personnel and traders to understand the new provisions. The legislative
process may take several years depending on the scale of changes and the capabil-
ity to manage and absorb them.

Transparent and Predictable Customs Procedures and

Border Formalities
Transparent, predictable procedures and border formalities are critical to the
smooth and efficient operation of international trade and travel and to the increased
competitiveness of the country and its economic operators. Chapter  4 addresses
these principles in more detail and discusses tools such as advance rulings.
Some administrative, fiscal, and trade policies—that is, suspensive regimes,
exemptions, free-trade zones, preferential treatment agreements, and indirect/
special taxes and duties—are very complex. This creates a challenge for traders to
understand these policies and for their consistent application and monitoring by
customs staff. Such policies make both administration and compliance more
expensive and difficult, and customs needs to work at delivering clear and simple
explanations of traders’ responsibilities under these policies.

PROFESSIONAL AND SKILLED CUSTOMS

WORKFORCE
The Customs Profession
A professional, well-trained, high-performing, and ethical customs workforce
underpins the customs administration. Customs officials need to have specific
knowledge, skills, and behaviors. The customs profession has unique and varied
roles, only some of which include customs inspector, customs service officer,
import and supply chain security specialist, post-control/clearance auditor, risk
targeting officer, intelligence officer, and customs investigator.
Some customs administrations struggle with this focus on professionalizing
their workforce. The absence of, for example, clear recruitment standards, stan-
dardized job descriptions, competency profiles, meritorious promotion policies, a
comprehensive learning and development program, and a professional career path
hinders an administration’s ability to improve its performance.

Key Features of an Effective Customs Human Resource

Management and Development Framework
A competency-based human resource management framework offers a sound
methodology to translate the customs strategic priorities and core values into

©International Monetary Fund. Not for Redistribution

88 Customs Matters: Strengthening Customs Administration in a Changing World

effective and efficient practices. Competency- “The goal of effective human

based management informs workforce planning, resource management is to
facilitates the recruitment and selection of candi- have the right number of
dates to meet the organization’s needs, and
people with the right skills
improves the alignment of learning needs to
organizational gaps. at the right place at the
The use of workforce planning and gap analy- right time.”
sis to assess skills and diversity needs to meet
current and future priorities enables customs to have the right number of people
with the right skills at the right place. Managers should consider human resource
development needs when having performance management discussions with staff,
recruiting a new employee, and developing annual work plans. Well-defined and
professional job descriptions contribute to effective and efficient recruitment,
training, and performance management programs.11
A needs-based training program will ensure that staff acquire and maintain the
necessary competencies for their duties. The first step in the development of such
a program is a training needs assessment that should be carried out as part of the
organization’s planning for the future. Typically, customs training and develop-
ment include a customs recruit induction training program, professional and
specialized training, core value training, and management programs.
A recruit induction training program is a good international practice. There
are often two components in this program. Firstly, there is an orientation to the
customs administration to become familiar with the administration’s vision, mis-
sion, operational goals, and operating environment. At the same time, recruits
need to understand their own role in achieving the mission and goals, their con-
ditions of service, institutional values and ethics, and sanctions for wrongdoing.
Secondly, other training components develop the knowledge and skills specifically
related to the recruits’ duties and to their practical application in an operational
environment. An induction training program delivered nationally builds a sense
of belonging into the organization, enhances the organizational culture, and
ensures consistency in delivery of the learning modules.
Specialized training and development modules provide for the enhancement
of knowledge and skills in areas such as valuation, classification, risk manage-
ment, investigative techniques, and others. Such modules allow the customs
officer to become more proficient following the induction training and some
on-the-job experience. This training may be offered by the customs administra-
tion or through bilateral or international organization support, including virtual
learning and recorded training sessions. Other specialized training for emerging
skills such as data management or data analytics may be obtained from private-
sector service providers or local colleges and universities and on the internet. Core
value training covering topics such as proper behavior in the workplace, respect

11
WCO has also developed a Framework of Principles and Practices on Customs Professionalism. For
more information and WCO tools in this area, see https://clikc.wcoomd.org/pluginfile.php/30120
/mod_label/intro/Intro_EN.pdf.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 89

for staff and clients, security protocols, harmonious working relations, and integ-
rity is often delivered in short modules and may be repeated at regular intervals
to ensure internalization of these principles.
Leadership and management development programs prepare those participat-
ing employees to assume more senior decision-making roles. The curriculum is
often built around key leadership competencies identified by the national public
service, including the ability to drive a shared sense of purpose and lead change;
relationship building; integrity and accountability; and the ability to  achieve
results in a timely, efficient, and effective manner. A good practice in the design
of such a program is to consider the distinctive operational challenges faced by
customs managers, such as managing remote work, shift operations, and so on.
Increasingly, customs administrations deliver context-based learning, using
real-life examples, simulations, and practical experience in addition to knowledge.
A good practice is to offer blended and online learning opportunities so that
learning modules can be accessed at any time, completed over multiple sessions,
and accessible from remote locations. Box 3.4 provides an example of human
resource management functional strategy.

Box 3.4. Example HRM Functional Strategy

Desired outcomes Objective Key actions

A customs administration Get the right number of Develop a comprehensive
that has the capability people with the right skill HRM plan linked to organi-
needed to deliver on the sets in the right job at the zational needs and aligned
core priorities now and in right time. with government priorities,
the future. organizational goals, and
available resources.
A professional, capable, Recruit, integrate, develop, Develop a customs compe-
ethical workforce that is and retain an adaptable tency framework including
service oriented, achieves workforce able to meet a repository of standard-
results, and is adaptive to challenges now and in the ized job descriptions, com-
change. future. petency profiles, and job
performance indicators.

Implement a national
induction training program
to integrate quickly and
effectively new employees
to facilitate performance,
commitment and
employee retention.

Develop competency-
based training and devel-
opment programs and cur-
ricula with blended and
online learning options.

©International Monetary Fund. Not for Redistribution

90 Customs Matters: Strengthening Customs Administration in a Changing World

Desired outcomes Objective Key actions

Effective leadership and Build leadership capability Develop and maintain a
management skills and and develop strategic and catalogue of leadership
attitudes demonstrated at front-line managers and management compe-
all levels of the equipped with the skill set tency profiles for both
administration. to lead and manage strategic and operational
change in a modern cus- managers, structured
toms environment, provide development programs,
clear direction and expec- and succession plans to
tations, assess results, and identify talent with strong
give timely feedback to leadership potential.
their team.
A workplace that is Develop and implement Provide effective human
respectful, inclusive, effective human resource resource management
healthy, and efficient, management practices and tools and a healthy work-
where people strive to delivery model. place for employees and
excel. leaders.

Develop workforce
diversity and flexible work
policies.

Source: Authors.

COHERENT INTEGRITY MANAGEMENT FRAMEWORK

The risk of corruption within customs administrations is prevalent because of the
very nature of customs work, which is directly linked to the collection of money
and the discretionary power of officials to enforce a wide range of complex legis-
lative regulations often in remote and largely unsupervised border checkpoints/
points of entry.
The most important institutional factors con- “Lack of integrity in cus-
ducive to a lack of integrity in customs include
toms undermines not only
complex administrative, fiscal, and trade policies.
Examples of such factors are suspensive regimes, operational performance
exemptions, free-trade zones, preferential treat- but also trust in govern-
ment agreements, special taxes and duties; restric- ment and public safety.”
tive tax and foreign trade systems; high tax and
tariff rates; complex and bureaucratic procedures; and weak transparency and
accountability. At the professional level, they may include poor salaries and a lack
of effective preventive, investigative, and disciplinary measures.
The prime responsibility for fostering an environment conducive to integrity
and to prevent corruption must rest with the highest political leadership. The
head of customs and the management team must advocate for transparency and
an accountable administration.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 91

Leaders must model the values of the administration through words and
actions; demonstrate probity, prudence, and rigorous stewardship of public
resources and assets; and create an institutional climate and an incentive structure
that fosters high standards of ethics, service, and accountability.
Designing and implementing an integrity management framework requires a
multifaceted approach. The IMF’s experience in assisting customs administra-
tions suggests that several elements need to be present, as shown in Box 3.5.
A well-resourced, professionally trained, and value-based customs administra-
tion is more likely to operate with integrity. It should have the funds to pay rea-
sonable salaries relative to the labor market to help retain staff and encourage
them to be proud to work in customs. Resources to invest in technology and
increased automation will lead to less interference by individual officials in cus-
toms transactions.
The international community has developed a wide range of instruments and
practical tools to develop effective customs integrity management practices.
Among different instruments and tools, the WCO developed the Revised Arusha
Declaration Concerning Good Governance and Integrity in Customs (2003) support-
ed by a good practices guide on the 10 principles of the Declaration and a model
code of conduct.

Box 3.5. Elements of an Integrity Management Framework

• A consensus within government, starting at the highest level, that customs should
operate based on professional and technical criteria and be free of intervention for
political or personal gain
• Extensive use of information technology and digitalization (zero paper) to reduce
human interaction, face to-face contact with clients, and the physical handling and
transfer of funds. ICT also increases the level of accountability and provides an audit
trail for review and monitoring of staff decisions.
• Modern management practices that emphasize accountability and service, active
engagement with the private sector to address issues of integrity, and an effective
control framework based on risk
• A professional customs workforce, based on transparent, merit-based selection,
appointment, and assignment, that is subject to a code of conduct for which there are
sanctions for inappropriate behavior
• An appropriate remuneration and reward system in addition to a career path for
deserving officers
• A legal and regulatory framework clearly defining the accountability, transparency,
and control environment for the use of public resources
• Transparent procedures and easily accessible information to the public and trade
community defining discretionary powers, appeal mechanisms, and service standards
• A streamlined organization structure, based on functional management with separa-
tion of duties, providing clear direction, standard operating procedures, and over-
sight to ensure uniform and consistent actions by all customs staff

Source: Authors.

©International Monetary Fund. Not for Redistribution

92 Customs Matters: Strengthening Customs Administration in a Changing World

EFFECTIVE BUSINESS CONTINUITY PLANNING

The purpose of business continuity planning is to ensure a reasonable effective-
ness of administration under critical conditions, including public health crises
(for example, pandemics), terrorist attacks, and natural disasters (for example,
hurricanes, floods, earthquakes, landslides) when work conditions may deterio-
rate significantly and/or the critical ICT systems may become inoperable. ICT
continuity relies on a protective physical infrastructure, a regular (for example,
daily) saving of important data, and the operation of a parallel mainframe com-
puter in a secure distant location that is unlikely to be impacted at the same time
by those natural disasters. The operational answer in such demanding times is a
return to paper-based essential operations until
electricity and/or the ICT systems can be restored. “Business continuity plans
Although there are customs business continuity ensure essential operations
international standards for natural disasters, the
of customs under extraor-
COVID-19 pandemic challenged leaders around
the world as it affected all activities and practically dinary situations and the
all locations of customs operations at the same safety and health of staff
time (with no haven to continue to conduct and clients.”
business).
A good practice is to refer to the reference material developed by international
organizations competent in customs matters, including the WCO, the World
Bank, and the IMF. Early in the process of managing COVID-19, the IMF devel-
oped and disseminated a Special Series of notes, including on Business Continuity
for Revenue Administration and Priority Measures for Customs Administrations12
to secure international supply chains, especially imports of essential goods, as well
as continuing to mobilize revenue, facilitate trade, and safeguard border security.
The IMF recommends the creation of a response team consisting of managers of
all ranks, supported by technical experts, to coordinate response procedures at
customs offices and border entry points, in collaboration with other government
agencies present at the border and foreign customs administrations. Special prac-
tical measures must be put in place for ensuring business continuity during pan-
demics, including those outlined in Box 3.6.
An example of a country applying a methodology to develop business conti-
nuity plans (BCPs) is the Seychelles Revenue Commission (SRC). The SRC has
established an Emergency Management and Business Continuity Committee that
leads the development of BCPs. Procedures have been developed and training
delivered to managers on how to complete risk assessments and to design
a BCP. Plans for high-risk areas including the airport passenger terminal, taxpayer
services, and information technology have been prepared. A disaster recovery plan
(DRP) was separately prepared as part of this process. The DRP allocates specific

12
This publication and other COVID-19-related relevant IMF publications from April 2020 can be
found on the IMF website, /Publications/Special Series Notes on COVID-19/Fiscal issues at https://
www.imf.org/en/~/link.aspx?_id=27A8645D20AA4186A005A31874F699D0&_z=z#fiscal.

©International Monetary Fund. Not for Redistribution

 Chapter 3 Institutional and Professional Foundations of Modern Customs Administration 93

Box 3.6. Special Practical Measures for Ensuring Business

Continuity during Pandemics
• Having a contingency plan and a governance framework to manage the crisis
• Protecting staff with personal protective equipment (PPE)
• Restricting traders and visitors from entering customs facilities with strict in/out
controls
• Reducing physical interaction during cargo inspections
• Conducting virtual audits
• Ensuring continuity of customs controls even at the expense of limiting the number
of crossing points
• Ensuring minimum disruption in the flow of goods across borders while assisting in
controlling the movement of the limited number of people (mainly truck drivers and
personnel of the various vehicles in international circulation, government officials,
and so on)
• Prioritizing and expediting critical consignments (for example, PPEs, basic foodstuffs,
medicines)
• Easing controls to minimize disruption and the administrative burden and cost to
businesses
• Postponing steps in controls that can be undertaken later (for example, PCA)
• Postponing or easing collection of revenue and penalties following government pol-
icies (while strictly registering all steps and incidents)
• Assessing duties and taxes to enable monitoring of late or failed payments after the
crisis
• Communicating the above principles to traders so they understand the new/interim
rules and protocols

Source: Authors.

roles, responsibilities, and the response procedures for a range of potential scenar-
ios, including widespread industrial action, acts of nature, and pandemics. An
Emergency Operations Center will be established to coordinate the response to
any of the scenarios detailed in the plans. As a result of this work, the SRC is
better equipped to maintain the provision of services and to respond effectively
to a wide range of potential challenges.

SUMMARY
A modern customs administration requires sound institutional and professional
foundations. Customs policy makers and executives should develop and commu-
nicate roadmaps to modernization and embrace international good practices for
managing an effective and efficient customs administration. Institutional
enabling factors include sustained political support, customs ownership and lead-
ership, and a supporting legislative framework. A well-skilled workforce with
strong ethical and organizational values is critical.
An appropriate governance framework, the use of strategic management, and
a functional organizational structure that clearly separates headquarters and field
responsibilities, as well as a business continuity and crisis management plan, are

©International Monetary Fund. Not for Redistribution

94 Customs Matters: Strengthening Customs Administration in a Changing World

key to improved performance. Customs should develop a coordinated border

management approach with other government agencies, build a cooperative rela-
tionship with the national tax authority, and foster partnerships with the trading
community.

REFERENCES
Crandall, William, and Maureen Kidd. 2010. “Revenue Administration: A Toolkit for
Implementing a Revenue Authority.” IMF Technical Notes and Manuals, Washington, DC.
https://www.imf.org/external/pubs/ft/tnm/2010/tnm1008.pdf.
European Commission. 2015. Customs Blueprints: Pathways to Better Customs. Directorate-
General for Taxation and Customs Union, European Commission, Luxembourg, Luxembourg.
https://data.europa.eu/doi/10.2778/77704.
International Maritime Organization (IMO). 1965. “Convention on Facilitation of International
Maritime Traffic.” IMO, London. http://www.imo.org/en/About/Conventions/ListOf
Conventions/Pages/Convention- on-Facilitation-of-International-Maritime-Traffic-(FAL)
.aspx.
International Monetary Fund (IMF). 2020a. “Business Continuity for Revenue Administrations.”
IMF COVID-19 Special Series, Washington,  DC.  https://www.imf.org/-/media/Files
/Publications/covid19- special- notes/ en- special- series- on- covid- 19-business-continuity
-for-revenue-administrations.ashx.
International Monetary Fund (IMF). 2020b. “Priority Measures for Customs Administrations.”
IMF COVID-19 Special Series, Washington,  DC.  https://www.imf.org/-/media/Files
/Publications/covid19-special- notes/en- special- series- on- covid-19-priority-measures-for
-customs-administrations.ashx.
UN International Convention on the Harmonization of Frontier Control of Goods. 1982.
https://treaties.un.org/ pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XI-A-17&chapter
=11&clang=_en.
US Census Bureau 2019. Values rounded.
US Department of State. 2000. “13103 Mexico - Agreement Regarding Mutual Assistance
Between Their Customs Administrations.” Treaties and Agreements, US Department of State,
Washington, DC. https://2009-2017.state.gov/s/l/treaty/tias/2000/126772.htm.
US Department of Transportation. 2019. Values estimated and rounded.
World Customs Organization (WCO). 2003. WCO Revised Arusha Declaration. http://www
.wcoomd.org/-/media/wco/public/global/pdf/about-us/legal-instruments/declarations/revised
_arusha_declaration_en.pdf?la=en.
World Customs Organization (WCO). 2020. WCO Annual Report 2019–20. http://www
.wcoomd.org/-/media/wco/public/global/pdf/about-us/annual-reports/annual-report-2019
_2020.pdf.
World Customs Organization (WCO). 2021. WCO SAFE Framework of Standards. http://www
.wcoomd.org/-/media/wco/public/global/pdf/topics/facilitation/instruments-and-tools/tools
/safe-package/safe-framework-of-standards.pdf?la=en.

©International Monetary Fund. Not for Redistribution

 CHAPTER 4

Customs in a World of Enhanced

Trade Facilitation
R. James Clark and Danielle Bernard

This chapter explores how to create a pro-trade and competitive national econo-
my while keeping appropriate revenue collection and border controls by (1)
ensuring trader-friendly and transparent procedures and (2) increasing coopera-
tion with other government agencies, the private sector, and other customs
administrations—particularly in developing countries (WTO, 2015).1 Furthermore,
the chapter aims to assist customs administrations to develop their strategies for
implementation of the various trade facilitation measures that are linked directly
or indirectly to customs.
There is no doubt that trade facilitation activities have a positive impact for
international traders when they are implemented effectively. Streamlining
customs formalities for imports, exports, and transit of goods has the multiple
benefits of increasing trade activity while reducing bureaucratic red tape and
expensive delays for traders as well as lessening administrative costs at the border.
Repeated studies have shown that improvements using trade facilitation measures
have comparatively greater positive effects on trade flows than reductions in tariff
barriers (Sakyi, Afesorgbor, and Kwako 2019). In addition, increased trade activ-
ity has a positive correlation to increased income/growth and reductions in pov-
erty and inequality (Sakyi, Afesorgbor, and Kwako 2019).
The WTO indicates that least developed countries (LDCs) stand to gain the
most from improvements in trade facilitation with reductions in trade costs—that
is, the cost of getting the goods from the exporter to the importer’s market—of
16.73  percent on average (World Trade Report 2015). An additional critical
strength of trade facilitation measures is that it allows administrations to focus
valuable resources on areas of highest risk and reduce costly delays for known
compliant traders.

1
The WTO estimates developing and least developed countries (LDCs) to accrue the greatest benefits
from trade facilitation measures; therefore, trade facilitation measures between developing countries
have the greatest potential for reducing costs and streamlining trade. The UN Economic and Social
Council determines which countries are LDCs. The WTO does not have a definition for either
developing or LDCs as members make their own determination, which can be challenged by other
members (World Trade Organization, World Trade Report 2015).

95

©International Monetary Fund. Not for Redistribution

96 Customs Matters: Strengthening Customs Administration in a Changing World

A FEW WORDS ABOUT TRADE FACILITATION

Trade facilitation in the broadest sense would be any action taken to encourage
trade or ease the movements of goods internationally. As a concept, it can apply
to the entirety of the supply chain.
In 2015, the director-general of the WTO noted, “Trade costs in developing
countries are, on average, the equivalent of a 219 percent import tariff. For each
dollar it costs to make a product, it costs a further $2.19 to bring it to developing
countries’ consumers. For high-income countries, this cost is closer to $1.34—
still a substantial surcharge. Cutting trade costs would therefore have a dramatic
effect around the world: a reduction of 1 percent would support a 3 to 4 percent
increase in trade growth” (Azevedo 2015).
Between tariff and non-tariff measures, one could posit that the reductions of
tariffs would have a greater impact on trade volumes and flows; however, tariffs
can be subject to political whims, sometimes contrary to international agreements
and accords. On the other hand, it is politically palatable to negotiate agreements
to reduce non-tariff barriers, red tape, or other impediments to trade by simpli-
fying, standardizing, and harmonizing border requirements.
Figure 4.1 depicts the main events since the end of World War II on the jour-
ney toward increased trade facilitation.

Figure 4.1. Key Trade Facilitation Events since World War II

1/7/1944
Bretton Woods Conference
framework for the
IMF and the World Bank
8/31/1986−4/14/1994
10/31/1947
Uruguay Round of GATT
23 Countries sign the
negotiations, with the largest, most
General Agreement on
complex, and comprehensive
Tariffs and Trade (GATT) December 2013
9/25/1974 trade negotiation significant
WCO Kyoto Convention on the impact on trade facilitation Bali Ministerial
5/16/1949 Simplification and Harmonization Declsion WTO Trade
The GATT comes of Customs Procedures 2/3/2006 Facilitiation Agreement
into force WCO Revised
Kyoto Convention

11/27/1947−10/26/1979 11/14/2001−2/21/2021
Seven Rounds of GATT negotiations The Doha Round of negotiations,
reducing tariffs on trade for AKA the Development Round,
member states, encouraging trade ongoing

6/2005
WCO
5/31/1952 SAFE Framework
Creation of the 1/1/1995
of Standards
Customs Co-operation World Trade
Counsel (CCC) Organization 22/2/2017
9/8/1945 1/1/1988 (WTO) WTO TFA entered
The IMF and the 9/11/1957−1/1/1972 Harmonized established into force when
World Bank 1/3/1947 CCC adopts international Commodity and the CCC becomes ratified by 2/3
come into existance IMF begins conventions for temporary Description and the World Customs WTO member-states
operations imporations in a variety of Coding System (HS) Organization (WCO)
circumstances, ATA Carnet,
ECS Carnet, and so on

Source: Authors.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 97

THE STATUS OF THE WTO TRADE FACILITATION

AGREEMENT
The most significant recent trade facilitation “The WTO TFA’s timeline
framework is the WTO TFA. TFA is based on the for implementation of the
core principles and measures contained in the
measures is linked to the
WCO Revised Kyoto Convention,2 which was the
key reference instrument during the WTO trade individual capacity of
facilitation negotiations. TFA sets rules on trade each  member-state, with
facilitation and requires members to implement a developing and least devel-
suite of trade facilitation measures to ease border oped countries receiving
congestion, increase customs transparency, and capacity development
speed goods to market. By now, many countries
assistance as well as addi-
have taken preliminary steps toward implementa-
tion; however, surveys by the UN Global Survey tional time to meet the
on Digital and Sustainable Trade Facilitation show TFA requirements.”
developing countries behind in implementation
of the various articles and measures, as many trade facilitation measures are com-
plex and require either additional capacity or resources to put in place. As can be
seen from the 2021 survey, implementing these measures has been particularly
challenging in sub-Saharan Africa, LDCs, and Pacific Island nations (UN Global
Survey on Digital and Sustainable Trade Facilitation 2021).3
The WTO TFA is, for customs, one of the most impactful international agree-
ments since the implementation of the GATT. It touches on all aspects of core
customs processes, such as transit of goods, clearance, and post-clearance audit,
to backroom activities, such as risk management, appeal procedures, and advance
rulings. The overarching driver behind the WTO TFA is to make trade flow more
freely by reducing the administrative burden through simplification, standardiza-
tion, and harmonization, done in a transparent manner, and under a coordinated
border management approach.
The conclusion of the TFA has provided an important boost and momentum
in moving the trade facilitation agenda forward. Development partners and
donors have contributed with substantial financial support, while international
organizations have launched dedicated assistance programs to support its imple-
mentation (WCO Mercator Programme 2014).
Technical assistance for trade facilitation is provided by the WTO, WTO
members, and other intergovernmental organizations, including the World Bank,
the WCO, and the UNCTAD. In July 2014, the WTO announced the launch of

2
For more information on RKC, see http://www.wcoomd.org/en/topics/facilitation/instrument-and
-tools/conventions/pf_revised_kyoto_conv.aspx.
3
See also https://www.tfafacility.org/ and https://tfadatabase.org/, where the WTO publishes the
official notifications sent by members regarding the implementation status of the WTO TFA.

©International Monetary Fund. Not for Redistribution

98 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 4.2. Progress on Trade Facilitation

(Digital and Sustainable Trade Facilitation, 2021)
Cross-Border Paperless Trade Paperless Trade Institutional Arrangement and Cooperation
Formalities Transparency

Developed economies 79.72%

Latin America and the Caribbean 68.88%
Middle East and North Africa 63.58%
Pacific Islands 35.48%
South and East Europe, Caucasus, and Central Asia 64.83%
South Asia 50.40%
Southeast and East Asia 71.20%
Sub-Saharan Africa 48.34%
Least developed countries 45.24%
Landlocked developing countries 54.30%
Small island developing states 44.53%
Global average 62.76%

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Trade facilitation score (%)

Source: UN Global Survey on Digital and Sustainable Trade Facilitation 2021.

the Trade Facilitation Agreement Facility, which assists developing and LDCs in
implementing the Trade Facilitation Agreement. The facility became operational
with the adoption of the Trade Facilitation Protocol on November 27, 2014.

Trade Facilitation in Crisis

The COVID-19 crisis underscored the critical need for more effective and effi-
cient trade and faster and more technologically based customs processes. The
crisis brought about by the pandemic laid bare the limitations of customs admin-
istrations who were still requiring paper documentation and in-person interac-
tions to release goods. The issue of customs and other border control agencies
holding up relief supplies is often cited as a major roadblock to international aid
getting to needed recipients as quickly as possible. This can be further complicat-
ed for landlocked countries that rely on transshipment to receive supplies, as
intermediary countries may apply additional rules and regulations for goods to
pass through their territory. There may also be export controls, transshipment
controls, and import controls on the same shipment. During an emergency, cus-
toms can facilitate goods movement quickly; however, if implemented poorly or
without the proper risk management controls in place, unscrupulous traders can
take advantage of the situation to avoid paying taxes and duties by misclassifica-
tion or mis-valuation or to move illegal, illicit, or contraband and counterfeit
goods, generating unfair trade and threats to citizens’ security and safety.
The requirement for more effective and efficient customs, which also act as the
coordinating body for other border control agencies, is clear. During the
COVID-19 crisis, almost every customs administration in the world implemented
some trade-facilitative measures to support national efforts to reduce infections
and protect first responders and members of the public. The WCO produced a
list of actions taken by various member-states to facilitate trade in goods required

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 99

to combat COVID-19, including measures such as lowering or waiving duties

and taxes (WCO 2020). The IMF also produced policy advice for administra-
tions to respond to the COVID-19 crisis (for example: Priority Measures for
Customs Administrations; and Tax and Customs Administration Responses [IMF
2020]). Likewise, the World Bank Group also published several series of publica-
tions to support countries in response to the pandemic4 (WBG 2020). Many
administrations also implemented other trade facilitation measures, such as
implementing e-declarations and accepting electronic documents, electronic sig-
natures, and e-payments, to name a few. This illustrates how even those adminis-
trations that perhaps did not have a formal plan to deal with a pandemic of this
nature were able to quickly implement many measures to face the crisis.
Additionally, as seen later, there are many humanitarian policy initiatives and
instruments designed to help reduce the impact of customs on relief efforts.
Unexpected events and crises like the COVID-19 pandemic can have a deep
and significant impact on international trade; for example, UNCTAD’s Nowcasts5
in December 2020 identified the value of global merchandise trade a significant
drop in export values and volumes in the first half of 2020 linked to the
COVID-19 pandemic. While global trade in merchandise improved in the third
and fourth quarters, it was insufficient to recover the drop from the first half of the
year. This would be the greatest contraction in merchandise trade since 2008
when, due to the financial crisis, the value and volume of merchandise trade fell
by 22 percent (UNCTAD 2020). However, improved trade facilitation measures
can be effective tools for mitigating some of the damage. This is particularly true
for low-income countries engaged in south-south trade, as complex trade arrange-
ments dissuade firms and countries from engaging in international production and
trade (Sakyi, Afesorgbor 2019). Trade facilitation measures are part of an overall
management strategy for all customs administrations where the underlying goal is
always to facilitate legal, compliant trade while focusing resources on the unknown,
noncompliant, or high-risk trade and traders. To this end, many of the trade facil-
itation measures mentioned here will be covered in greater detail in other chapters
as they have both a facilitation aspect and a compliance or control aspect.
The UN Economic Commission for Europe (UNECE) and its UN Centre for
Trade Facilitation and Electronic Business (UN/CEFACT) define trade facilita-
tion as “the simplification, standardization and harmonization of procedures and
associated information flows required to move goods from seller to buyer and to
make payment” (UNECE 2012). This is not a new concept, and prior to the
WTO Bali Agreement, various UN organizations and the WCO developed the
international standards to encourage customs modernization and trade facilita-
tion. Many organizations, including, at the international level, the IMF and its

4
For more information on the World Bank Group response to the COVID-19 Pandemic see: https://
www.worldbank.org/en/who-we-are/news/coronavirus-covid19.
5
UNCTAD’s global merchandise trade Nowcasts are real-time estimates of current trends in interna-
tional trade in goods based on timely information from many data sources. The nowcasts presented
correspond to total merchandise trade in value and volumes for the previous and current quarters.

©International Monetary Fund. Not for Redistribution

100 Customs Matters: Strengthening Customs Administration in a Changing World

sister organization the World Bank, and non-government organizations (NGOs)

have consistently supported their implementation. Trade facilitation implicates
the entire trade supply chain and invokes improvements between all trade chain
partners including buyers, suppliers, transporters, wholesalers, banking and
finance, importers, exporters, shippers, and so on. However, for our purposes, the
discussion is limited to customs, traders, other border control agencies, and trade
chain partners who interact with customs and those trade facilitation measures
that directly or indirectly impact the work of customs.

THE TRADE FACILITATION PILLARS AND CRITICAL

CONSIDERATIONS FOR EACH
The United Nations Trade Facilitation Implementation Guide identifies the four
pillars of trade facilitation as transparency, simplification, harmonization, and
standardization (United Nations UNECE 2012). These are the key concepts on
which successful and lasting facilitation measures are built. In this chapter we will
explore all four pillars, providing suggestions for an implementation strategy that
can be adapted to individual customs administrations’ current needs.

Pillar 1: Transparency
Information and advice need to be available for all who participate in trade.
Business requires predictability in costs, processes, and government requirements.
Transparency supports businesses by making the “rules of the game” accessible, and
this in turn leads to improved compliance as traders are informed and understand
the business of trade. There should be no mystery to importing or exporting,
and guidance documents should be written in plain terms, not overly technical, and
available in the languages that traders speak and, when possible, by electronic
means. Transparency refers to predictability on the one side, which indicates the
degree of essential information on customs and all border formalities, rights, and
obligations, available in advance to all stakeholders and, on the other side, account-
ability, which presents a clear responsibility for each country to safeguard private
and public interest on trade, to enforce policy and procedural measures to ensure it,
and to provide reliable information to all parties concerned. Furthermore, it
includes participation of trade stakeholders (public and private sector) in consulta-
tion and interaction in the legislative process, providing their views and perspectives
on proposed laws before enactment to facilitate compliance.

Pillar 2: Simplification
Customs processes need to be streamlined for all agencies that work together to
manage the border. Coordinated approaches should make crossing the border as
simple and straightforward as possible. Processes are examined to remove duplica-
tion, unnecessary approval levels, discretion, and any nonessential steps. This is often
achieved using technology, ensuring the appropriate legal framework is in place, and
coordinating with other border agencies and in consultation with traders.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 101

Pillar 3: Harmonization
National processes need to be aligned with international conventions, standards,
and practices. Harmonization creates opportunities for greater cross-border coop-
eration between administrations. Customs operations should be similar around
the world—this is achieved through the adoption of international standards, the
cross-border sharing of information with other customs administrations, and the
use of reciprocal agreements and other activities that promote working closer with
partner administrations.

Pillar 4: Standardization
Standard policies, procedures, formats, documents, and processes need to be
created within customs administrations so goods are treated the same way at every
border crossing. The standardization of processes supports eventual cross-border
harmonization. This is achieved through various methods including creating one
declaration document, having standard operating procedures for when goods are
searched or seized, or publishing a list of required documentation to provide with
a declaration. This provides predictability and consistency to anyone that deals
with the customs administration.
Harmonization refers more to aligning policies to international standards,
while standardization helps ensure consistency for traders that processes and doc-
umentation required for importing will be the same. As these two pillars work
closely together to promote trade facilitation, we discuss them in the same section
later in the chapter.
Next, we explore all four pillars, giving concrete suggestions for implementa-
tion. We also discuss the complexity of implementing the measures as well as
provide a suggested implementation strategy, or roadmap, that can be adjusted to
individual customs administrations’ needs.

Transparency
The goal of customs is to achieve compliance: compliant traders classify, value,
and declare the origin and amounts of their goods honestly following policy and
pay duties and taxes owing without intervention from customs. Traders and oth-
ers involved in international trade should be able to access the necessary informa-
tion to determine everything they need to complete their transaction. The aspects
of trade facilitation that promote transparency include published customs infor-
mation, fairness, access to expert advice, post-clearance audit (PCA), stakeholder
engagement, trusted trader programs (TTPs), and access to recourse.
On the other hand, transparency and accountability are part of good gover-
nance and integrity programs in customs administrations (as covered in more
detail in Chapter  3). Mechanisms ensuring transparency and accountability
encourage both public officials to act in the interest of the public and enterprise
representatives to protect the interest of shareholders. Good governance and
integrity are nowadays integral parts of every customs administration’s strategic
and operational objectives. The Declaration of the Customs Co-operation

©International Monetary Fund. Not for Redistribution

102 Customs Matters: Strengthening Customs Administration in a Changing World

Council concerning Good Governance and Integrity in Customs (WCO Revised

Arusha Declaration 20036) is a tool and important feature of a global and effec-
tive approach to preventing corruption and increasing the level of integrity in
customs administrations.

Published Customs and Border Procedures Information

and Service to Traders
One of the easiest ways to encourage compliance is by ensuring that traders and
the trading public have access to all appropriate acts, codes, regulations, and pol-
icies, and in some cases, customs have also published written advance rulings. The
publication of such information can be straightforward; the challenge is ensuring
that this information is stated in plain, understandable language; is available to
whomever wishes to read it; and is kept up-to-date. The use of guidance docu-
ments to explain import, export, and transit of goods procedures, including
penalty systems, rates of duty, and appeal rights, as well as how to apply for vari-
ous customs programs, such as bonded or customs-controlled warehouses, draw-
backs, or temporary admissions, is a critical step in improving trader knowledge
as well as creating transparency around customs processes. All guidance docu-
ments need to not only contain information about the program or customs pro-
cess but also give a clear indication of what needs to be done to be compliant.
In the modern age, publishing of information is
not as onerous as it once was. Customs administra- “A critical aspect of trans-
tions can develop web-based information, which parency is ensuring every-
can be readily available to traders and the public at one involved in the trade
large for little effort or cost, including the use of chain has the informa-
social media, which has demonstrated effectiveness
tion  needed to make
in communicating and updating the trade com-
munity about customs-related issues. The WTO informed  decisions and
TFA under Article 2 requires that each member be compliant.”
shall make available (and update) (1) descriptions
of procedures for importation, exportation, and transit, including recourse pro-
cesses and rights as well as the practical steps required; (2) required forms and
documentation for these processes; and (3) how to contact customs enquiry
points (WTO 2020b). Table 4.1 provides more information.
Transparency requires not only that the information is available but that traders
are able to ask customs questions and seek expert advice. The provision of an enqui-
ry point is also a strong trade facilitation measure. Enquiry services can include
internet or telephone self-service options with automated systems, including bots,
linked to service agents to respond to more complex questions. The email service
treats questions that range from basic to complex. Any service of this type will need
to include service standards noting how long responses or wait times should be. In

6
Point 3 of the declaration sets out standards of transparency.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 103

TABLE 4.1.

WTO TFA: Article 1.1 – Publication, Key Information to Be Made Available

• Procedures for importation, exportation, and transit of goods (including port, airport, and other
entry-point procedures), and required forms and documents
• Applied rates of duties and taxes of any kind imposed on or in connection with importation or
exportation
• Fees and charges imposed by or for governmental agencies on or in connection with importation,
exportation or transit
• Rules for the classification or valuation of products for customs purposes
• Law, regulations, and administrative rulings of general application relating to rules of origin
• Import, export or transit of goods restrictions or prohibitions
• Penalty provisions for breaches of import, export, or transit formalities
• Procedures for appeal or review
• Agreements or parts thereof with any country or countries relating to importation, exportation, or
transit
• Procedures relating to the administration of tariff quotas
• Points of contact and opening hours for all customs office
• Q&A information and communication channels for asking questions and filing complaints
Source: World Trade Organization 2020.

international call centers, a frequently used service standard is that calls are
answered within 120  seconds and more complex calls are transferred to senior
trained agents who may have to call back with more information. A frequent email
service standard is that all emails receive an acknowledgement within 48 hours and
questions are responded to within seven days; more complex questions are referred
to senior trained agents who may take up to 30 days to respond. Requests for expert
advice are discussed in the advance rulings section that follows.
For many administrations, a small contact center could manage most enquiries
on a national basis. Some administrations have calls directed to local customs
offices or other border agencies for response—a practice that is not recommended
as service is inconsistent, is more difficult to manage, and does not ensure that the
correct information is shared with traders. Contact centers can develop what is
known as a “probing guide,” which is a collection of responses to the most fre-
quently asked questions. Information agents can use the guide to provide callers
with the information they require. The most basic questions can also be pro-
grammed into most call center systems or placed on webpages for self-service
purposes. At times, it is necessary to talk to an agent to clarify the question and
find the required information.
Contact centers can also be a source of information leading to further analysis
of current customs formalities, identification of procedures, and documentation
that need further streamlining and simplification. Figure 4.3 is a typical contact
center flow chart showing how enquiries can be treated either by phone, by email,
or through internet inquiries.
In addition to the critical elements of availability and usability, information must
be up-to-date. Whatever is used or published must have a regular review to ensure

©International Monetary Fund. Not for Redistribution

104 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 4.3. Contact Center Flow

Needed
Information YES
Found?
Automated Response
Contact System
Center YES
NO

Needed
Information
Found? Enquiry
Resolved

Email/Webform YES
First Level Agent
Question Using Systems and
about Imports, Probing Guide NO
Exports, Transit
or the border

Computer YES
Senior Agent

Departmental
Trader or Needed
Internet Website
Other Information
Search Online info,
Interested Found?
Forms, etc.
Party

NO

Source: Authors.

that any changes to programs, policies, regulations, applicable codes, and forms are
reflected in the information provided to traders and others. It is important to note
that enquiry points can provide general information on import and export proce-
dures, forms required, and regulations for border agencies. They are not, however,
a replacement for advance rulings, which are legally binding rulings and require a
set application process. Advance rulings will be discussed later in the chapter.
If so desired, enquiry agents can play a key role in outreach and training to the
trade community. These agents can provide training for traders and other supply
chain partners, like customs brokers/agents, transporters, and freight forwarders,
and so on. Providing training will highlight the transparency of an administration
and help promote voluntary compliance.
A basic level of training can be achieved with an easily accessible website and
clear published procedures. More advanced outreach programs can provide work-
shops on importing topics developed for specific audiences, such as Small and
Medium Enterprises (SMEs), customs agents, or brokers, and so on.
As an example, in March 2021, the National Customs Service of Costa Rica
launched its first web portal called “AduanaFácil (Ministerio de Hacienda 2021)”
inspired by articles 1 and 2 of the WTO Trade Facilitation Agreement. This web
portal, a first for Customs in Costa Rica, developed a “one-stop-shop” approach
that includes more than 25 guidelines, 16 procedures manuals, and six services.
Everything is written in easy-to-understand language and allows customs to
increase transparency and trade predictability and promote foreign investment
and voluntary compliance. In just three months after its launch, this new web
portal reached the threshold of more than 73,000 visits from 62 countries and has
been broadly recognized as a key achievement of the National Customs Service
by other governmental agencies and the private sector at the national trade
facilitation committee (NTFC). This initiative has demonstrated the value

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 105

added for these types of tools for providing information, services and strengthen-
ing the relationship between Customs and stakeholders. Costa Rica also used the
portal to support traders during the COVID-19 pandemic by providing service
and information while limiting face to face contact.

Fairness Provisions
Fairness provisions speak to equal treatment of traders and others who use the
services of customs. There is no differentiation of information provided to any
trader and no differentiation in treatment of compliant traders and trade chain
partners. All fees and charges for the same services are published and known
without differentiation based on the trader. Compliant shipments identified in
the green channel that were automatically cleared for release by the system are
cleared and released in first in, first out (FIFO) order with no preference given to
any particular trader. (This, of course, may be influenced by any TTP whereby
program participants receive expedited clearance due to their high level of com-
pliance; TTPs are discussed in depth later.)
Imports and exports should not be selected for either documentary review or
physical inspection arbitrarily. They should be selected based on risk, as articulat-
ed in a comprehensive risk analysis and management process as discussed in
Chapter 5. While there may be benefits to conducting random inspections, this
process should be conducted in a statistically randomized way and not at the
arbitrary whim of a customs officer. One way to avoid this risk is to have a com-
puter system select those shipments that will be randomly reviewed.
Article 10.6 of the WTO TFA addresses the role of customs brokers, recogniz-
ing the role that brokers play in concert with many customs administrations. The
agreement specifically bars member-states from introducing any new require-
ments for the mandatory use of customs brokers for completing any customs
formalities. In a trade facilitative environment, traders should be able to complete
their customs requirements without a mandatory intervention of a broker,
although there may be business reasons for engaging one.

Access to Expert Advice

Providing access to expert advice within an administration can be achieved in several
different ways, including access to advance rulings, a consistent appeals mechanism,
and training offered by the administration to various actors in the importation
process, as outlined in the preceding section on published information.
One of the main ways to provide access to advice for traders is through advance
rulings. They allow traders to access consistent, binding decisions on how goods
will be treated when they are imported. This allows traders to better plan for the
costs of importation. Predictability of the rules and their administration is critical
for business. As mentioned previously, advance ruling are more specific, will often
entail an application package supplied by the trader, and may include product
information, data on the origin of various components, and so on. The officer will
then conduct research and verification of the goods, including sending any samples
to the customs laboratory in order to issue the advance ruling.

©International Monetary Fund. Not for Redistribution

106 Customs Matters: Strengthening Customs Administration in a Changing World

The main features of an advance ruling are that “Integrating the AR appeal
it is binding and provided in writing, has a right to process into one that is
an appeal, and is issued within a reasonable time
already set up for post-
frame, as defined by the WTO TFA. Having the
ability to publish the advance ruling (under ano- clearance audit can build
nymity of the requesting company) for other efficiencies.”
traders to access will increase the transparency of
the process and eliminate multiple advance ruling requests for similar products
from different traders. Also, the exchange of advance ruling among trade treaty
partners is highly recommended to provide uniform treatment to stakeholders
within the free trade area. Application requirements should be published and
readily available. All traders should be able to request an AR with no arbitrary
discrimination in place.
To properly execute an advance ruling program, an administration will need a
structure in place. It will require experts working in the areas that the advance
ruling are offered, the ability to publish the requirements and outcomes of the
rulings, and access to an appeals process. The main areas of advance ruling include
tariff classification, origin, and valuation, and detailed training in each area should
be provided to the customs officers providing the rulings.7 Combining the advance
ruling program with that of PCA is one way to take advantage of the experience
of a PCA program, as many of the skills of an advance ruling officer are transfer-
able to  PCA.  These skills include knowledge of the tariff classification and
valuation programs, ability to conduct research, and strong written and oral com-
munication. If officers are rotated regularly, then an effective career progression
includes work as an advance ruling officer followed by work as a PCA officer.
One other feature of an effective advance ruling program is providing traders
with a right to an appeal. The advance ruling appeal process should be operated
independently from the area that issues the advance rulings, either at a higher
level of decision-making or in a separately operated recourse division. (Appeals are
discussed in further detail in a subsequent section.) Integrating this appeal process
into one that is already set up for PCA can help build efficiencies into the process
and take advantage of expertise in program areas.

Post-Clearance Audit
PCA is a control measure that verifies the information declared to customs using
the books and records of the importer and their customs agent or broker to con-
firm that the correct duties and taxes are paid. It is a method used to measure the
compliance level of an importer. Customs administrations that have an effective
PCA program in place spend fewer resources at the border verifying basic customs
information and can focus resources on areas of higher risk. Since fewer

7
Detailed guidance on AR is provided by WCO on its technical guidance; for more, see http://www
.wcoomd.org/-/media/wco/public/global/pdf/topics/origin/instruments-and-tools/guidelines/guidelines
-on-advance-rulings-for-classification-origin-and-valuation.pdf?la=en.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 107

shipments are subject to inspection or verification at the border, there are fewer
delays and reduced dwell time as cargo is released more quickly. It also gives
administrations the confidence to know that irregularities in customs declarations
will be discovered after the goods are imported. Unfortunately, for most develop-
ing countries, there is limited investment in PCA, as it is complex work, requiring
specialized training, sometimes without immediate benefits for the administra-
tions. A greater focus in this area has the potential in the short term to increase
revenue and in the longer term to have a significant impact on trader
compliance.
The key elements of a PCA process are based on the principles of it being risk-
based and transparent and providing for due process. It is a program that can
measure the compliance of traders and allow for segmentation of traders into risk
levels. This is an important mechanism that brings confidence to facilitation of
importations across the border without the checks being performed at that time.
The selection of entities to audit should be based on a variety of factors,
including identified risk indicators from the customs administration’s risk man-
agement process, its analysis of customs regime compliance issues, HS code
studies, and relevant sectoral studies. The results of the audits should be fed back
into the risk management cycle to ensure that future risking decisions are made
with current information. More information on the technical aspects of risk man-
agement and PCA can be found in Chapters 5 and 6.
A challenge often faced by administrations is to implement a full systems-
based PCA program while building staff capacity and establishing proper policies
and structures concurrently. A systems-based PCA or customs audit program
means that PCA should not be based solely on the customs transactions presented
or selected at a given time; rather, it should be a review of the systems (ICT or
paper-based systems for ordering, purchasing, shipping, insurance, banking, pay-
ments and so on) to verify that the correct information is collected and used
appropriately at each stage in the import, export, and transit of goods processes,
including inward and outward processing, to satisfy customs requirements.
Establishing a PCA section necessitates a large amount of work and commitment
from the administration. It may require the revision of legislation or changes in
organizational structures. Each administration will be starting from its own
unique operational environment and will need to develop a customized plan for
developing a PCA section or building capacity into a section already in place.
PCA is an iterative process that begins with document reviews and transaction-
based audits and moves toward system-based audits. The PCA program can be
implemented in phases to ensure that a solid foundation is created. In this way,
administrations can begin to reap the benefits of improvements in revenue and
the emergence of compliance results.

Stakeholder Engagement
For any trade facilitation measure to be successful, a thorough stakeholder
engagement process should be developed. The administration should formalize

©International Monetary Fund. Not for Redistribution

108 Customs Matters: Strengthening Customs Administration in a Changing World

an engagement process and delegate an organizational area to oversee the process

and to guide the many program areas in how they will identify stakeholders and
methods of engagement, compile the issues, and report on findings.8 Figure 4.4
represents how this process works. This stakeholder engagement unit can be part
of a communications or public relations division of an administration. It is
important that all areas of the administration follow the same framework and
processes in their engagement.
Stakeholder identification is an important part of the process. A customs
administration should look at stakeholders both inside the government and in the
private sector. Government or border-related bodies, like revenue agencies, health
and agriculture ministries, and immigration authorities, should be included.
Private sector bodies having an interest in border and trade matters should be
considered, and it is important to look at more than just trader and commercial
entities. Police, security, and IT organizations are also important to consider in

Figure 4.4. Stakeholder Engagement Model

Proposal for new
Provide
intiative or
feedback to
change to an
stakeholders
existing one

Refine proposal
Identify key
based on
internal
feedback
stakeholders
analysis

Multimodal
consultations: Identify key
person, small external
groups or at stakeholders
trade events, Ensure external
and so on stakeholder
representation is
balanced, large,
medium, small,
gender, and so on
Source: Authors.

8
For more on building customs–business partnerships, see http://www.wcoomd.org/-/media/wco
/public/global/pdf/topics/facilitation/instruments-and-tools/tools/customs-business-partnership-guidance
/customs--business-partnership-guidance.pdf?db=web.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 109

addition to customs agents/brokers, freight forwarders, couriers, and transporta-

tion companies.
One potential problem with stakeholder identification is the tendency to focus
mostly on large stakeholders that hold a lot of influence. A balanced stakeholder
engagement strategy includes smaller traders, female trade organizations, and
minority groups. Including multiple voices in the conversation can bring new
perspectives and help make the trading system more accessible. This can have
economic benefits by ensuring an inclusive business environment.
After stakeholders are identified, the method of engagement can be developed.
Having a standardized process for conducting the engagements, with flexibility
built in depending on specific circumstances, will allow for a streamlined process
that should be conducted in a reasonable time frame. These methods should take
the stakeholders’ needs into consideration, including any language or cultural
barriers, and ensure that all stakeholders have the same level of access to the
engagement process. Formal engagement channels can then be established, and
stakeholders can be confident that their concerns will be heard.
It is important that the administration customize the engagement process to
meet the needs of their stakeholders. For example, if there is limited internet
access in many areas of the country, it will be more important to have written
material available and schedule in-person engagement sessions. Geographically
dispersed populations may mean that engagement happens in a number of differ-
ent centers of business where smaller countries may be able to hold one session in
the capital city.
It is also important to have a formalized process for reporting back to stake-
holders on the results of the engagement practice. Without feedback demonstrat-
ing interest and results, stakeholders will quickly lose confidence, while timely
and constructive action and feedback will build trust, cooperation, and voluntary
compliance. This feedback can be as simple as a printed report circulated or pro-
vided online. Sometimes it may be preferred to have a formalized meeting to
report back to individual stakeholders. The method of reporting will depend on
the constituency of the stakeholder group and can be decided in consultation
with the stakeholder engagement unit.
Once these communication channels and processes are in place, the adminis-
tration can be in regular contact with stakeholders. The national trade facilitation
committee can set up standing meetings with key stakeholders to take place at
defined intervals of time, not just when a certain issue needs to be discussed.
Having this open forum for dialogue can help stakeholders present their issues to
customs before they become bigger problems and allows for earlier and less costly
resolution.

Trusted Trader and Authorized Economic Operator Programs

While all authorized economic operators (AEOs), are TTPs, not all TTPs are
AEOs. Both are based on the compliance histories of traders and may grant cer-
tain privileges. The main difference between them is that the AEO programs

©International Monetary Fund. Not for Redistribution

110 Customs Matters: Strengthening Customs Administration in a Changing World

include security requirements and standards while not all TTP include such
requirements and standards. Many of TTPs are only focused on compliance,
including tax compliance. TTPs can be the first step in the evolution to a full
AEO without the significant investments.
As a good example, in Belize, customs introduced a TTP in 2017 to replace a
Voluntary Compliance Program (VCP) that removed penalties for companies
that chose to disclose errors or noncompliance. The TTP built on the VCP and
gave additional defined benefits to members to allow for faster, easier cargo clear-
ance. It is aimed at importers and includes a rigorous risk assessment and periodic
risk testing. Approximately 80 percent of imports by CIF are now brought in by
TTP members with trade by members increasing by 35 percent since the start of
the scheme and, importantly, revenue from TTP members increasing by more
than 50 percent.
Pursuant to Article 7.7 WTO TFA, each member shall provide additional
trade facilitation measures related to import, export, or transit of goods formali-
ties and procedures to operators who meet specified criteria, called authorized
operators (AO). Alternatively, such trade facilitation measures can be offered
through customs procedures generally available to all operators, and establishing
a separate scheme is not required.
Some factors to consider when setting up AO qualification criteria include:
• demonstration of a system to manage customs records,
• a positive record of compliance,
• financial stability,
• the ability to post appropriate security,
• meeting the required level of supply chain security, or
• factors related to regulations or procedures for importation that can be
measured by the administration.
None of the above criteria should be unnecessarily restrictive or
discriminatory.
In 2005, the WCO adopted the SAFE Framework of Standards, one of the key
components of which is AEO. The framework set out a high standard to meet in
establishing a national AEO scheme.
Administrations in less developed nations may
want to start with a national TTP that has a “If the administration is fac-
lower threshold for obtaining membership. ing an importing commu-
Building a TTP based on achievable standards nity that has a large amount
allows local traders to work with an administra- of small and medium-sized
tion to improve compliance. enterprises, it can look at
It is important to balance the work that a
having a tiered TTP with
trader must complete to meet the set AEO crite-
ria with the benefits that it will accrue once they benefits increasing as more
successfully become a member. The benefits criteria are met by the
should be published, be easily understood, and trader.”

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 111

represent a tangible reward for their efforts. Some of the benefits can include
fewer inspections or priority treatment at the border, reduced security and guar-
antee requirements, expedited release and pre-clearance, and simplified proce-
dures. In some customs administrations that do not correctly apply risk manage-
ment principles, have excessive customs officer discretion, or suffer poor border
management, the benefits that would normally accrue under a TTP or AEO are
severely eroded, making them less attractive to the trader and, in reality, a barrier
to trade rather than a facilitation measure. Zimbabwe, for example, launched an
AEO program but a few years later realized that it was not achieving the planned
or desired results for either the administration or participating traders. In 2020,
an action plan for legislation and needed reforms was introduced. The plan has
been shared with industry, focuses on enhanced program management and
improved client relations, and aligns the program to international standards.
Results of PCA should be included in the assessment of a trader’s AEO appli-
cation. If the administration has a well-developed PCA program, it can draw on
the information and intelligence generated by PCA officers through completed
compliance reviews on the trader to compile a report of the trader’s compliance
history. An administration should establish a qualified team in AEO certifica-
tion, which can establish contacts, develop dialogue, and closely monitor the
applicant until the trader compliance level and trust develop to satisfactory lev-
els. The AEO team shall cooperate closely with experienced PCA officials who
may assist in the design of AEO guidelines and recommendations for the traders
to help them improve their internal procedures and better demonstrate their
compliance levels. While the PCA approach related to AEOs would be more
efficient when used in situations when the information and explanations given
by the company do not satisfy the administration, PCA’s main role is broader
than merely supporting AEO.
If the administration is facing an importing community that has a large
amount of small and medium-sized enterprises (SMEs), it can have a tiered TTP
with benefits increasing as more criteria are met by the trader. It can sometimes
be difficult for SMEs to meet strict AEO criteria or have the financial ability to
invest in security and other controls. This option will give these traders more time
to build their capacity to meet the AEO criteria while still realizing some benefits
of the program by meeting a less strict standard and provide encouragement for
graduating into a higher tier.
One added feature of AEO programs is that a mutual recognition agreement
with a foreign AEO program could be considered. This will significantly improve
the benefits to a trader by allowing them access to the foreign AEO program by
virtue of their acceptance into their home administration’s program. This is a
particularly significant benefit for landlocked developing countries (LLDCs), as
the bulk of their trade must pass through at least one other jurisdiction, increasing
the costs of both importing and exporting. In some cases, such as the East African
Community (EAC), LLDCs’ transport costs can be as high as 75 percent of the
value of the export (Hassan, Odularu, Babatunde 2020). This type of program
has the potential to reduce transit time and costs for traders.

©International Monetary Fund. Not for Redistribution

112 Customs Matters: Strengthening Customs Administration in a Changing World

AEO mutual recognition agreements should not incur many added costs for
the administration as the acceptance into the foreign AEO program is contingent
only on the trader meeting the home AEO program requirements. Having a well-
developed AEO program in place positions a customs administration to take
advantage of mutual recognition agreements and to make those agreements more
attractive for potential partners.
WCO has developed and published an AEO Compendium (WCO 2020),
which has become a single point of reference of information for customs admin-
istrations, the private sector, and other stakeholders. Information in the compen-
dium is provided and verified by WCO members. The AEO compendium is
incorporated in the WCO SAFE Package,9 a resource that contains several tools
to assist with establishing and administering AEO programs.

Access to Recourse
It is important that customs administrations work in a transparent way and that
they be accountable for their decisions. One way to hold customs administrations
accountable is through an appeal or review mechanism. There can be an imbal-
ance of power between a trader and customs, and one way to ensure fairness and
to reduce corruption is through accountability. Requiring that decisions be pro-
vided in writing and include a detailed explanation of the reasons the decision was
made is one way to increase transparency and allow the trader the ability to pre-
pare an appeal.
In the WTO TFA, providing an appeal mechanism is mandatory for any
administrative decision that is issued by a customs administration. This can
include both actions and inactions taken by customs. The Revised Kyoto
Convention (RKC) sets out key governing principles for customs administrations
including principles for appeals. The appeal system should consist of four levels:
(1) the right to request the reason for the decision, (2) the right of an initial
appeal to customs, (3) the right of further appeal to an authority independent of
customs, and (4) the right of appeal to a judicial authority.
Having an escalating scale of appeals allows the customs administration to
quickly correct small oversights or mistakes at a lower level while still providing a
mechanism for a higher-level review when warranted. This can save time and
money for both customs and the trader. As the appeal advances through various
levels, the process should move to a more autonomous review, first allowing the
customs administration to review its decision and then moving to an arm’s-length
review by an independent authority or administrative tribunal before being heard
by the courts. Each of these levels should have a reasonable time allotted for a
decision to be rendered and the ability to escalate the issue if a decision is not
forthcoming within that time frame. This will ensure that customs does not arbi-
trarily stall a decision that it views as unfavorable.

9
For more information on WCO SAFE package, see http://www.wcoomd.org/en/topics/facilitation
/instrument-and-tools/frameworks-of-standards/safe_package.aspx.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 113

Access to the different levels of appeal should be the same for each trader
without any unnecessary barriers, such as fees to submit an appeal or overly com-
plex procedures. However, it is acceptable for customs to require that the duties
and taxes be paid or security be posted in the form of a bond or some other
financial instrument prior to accepting an appeal request. Failure to pay the duties
and taxes owing or post security can result in additional interest charges for the
importer. A trader should not be required to use the services of an agent, broker,
or lawyer to lodge an appeal.
In all cases, customs shall be required to provide the reasons for the review
decision, whether the appeal is accepted or dismissed, in writing to ensure trans-
parency. The right of appeal in customs matters will contribute to a predictable
trading environment, especially in conjunction with the publication of customs
law and regulations.
Results of the hearings of any administrative tribunal or appeal mechanism
should allow for those decisions and reasons to be published. This allows a collec-
tion of jurisprudence for traders to review when considering an appeal. It can also
be used to ensure consistency in treatment to guide both traders and customs
officers in making future decisions.
It is also worthy to consider investing resources in delivering training to judges
since customs and international trade are complex contexts with which judicial
authorities may not be familiar and which may cause misunderstandings of some
operations and provisions. It is equally important to promote transparency at
administrative and judicial tribunals as a key element for fair and impartial
resolutions.

Simplification of Trade Formalities

Much has been written in the past few years about “The real challenge is to
the complexity of customs formalities. The understand why certain
Organization for Economic Co-operation and
steps exist and eliminate
Development (OECD 2020) publishes trade
facilitation indicators and includes metrics specif- those that do not add
ically regarding simplification and harmonization value.”
of trade documents. While many assume these
requirements and formalities are “customs” requirements, in fact there are often
many different agencies involved with the import and export processes, often each
with its own specific documentary requirements. Simplification speaks to cus-
toms working with the other regulatory authorities to look for overlap and dupli-
cation and eliminate them at the same time as customs looks to streamline its own
requirements. This requires looking at not only what information is required but
also when and how it can be collected and used.
Technology is a key enabler in simplification; however, there is a tendency in
some customs administrations to mirror existing processes and to simply use a
computer to do a function that used to be done manually with paper documents.
The real challenge is for administrations to understand why certain steps and
requirements exist in import, export, and transit of goods procedures and to

©International Monetary Fund. Not for Redistribution

114 Customs Matters: Strengthening Customs Administration in a Changing World

eliminate those that do not add value to the whole process. In this context, busi-
ness process reengineering (BPR) is an important approach for streamlining
procedures, defining stakeholders’ interactions, and reducing and defining the
flow of documents and information. Management should focus on continuous
improvement of customs processes, help identify organizational bottlenecks, sim-
plify procedures and formalities, and bring business practice in compliance with
international standards, such as the TFA. Engaging with stakeholders in the pri-
vate sector is critical in identifying bottlenecks, overly bureaucratic processes, and
roadblocks to trade facilitation. As there are oftentimes many government agen-
cies involved with border procedures, it is equally important to take a whole of
government approach to ensure that one bottleneck is not inadvertently replaced
by another.
Furthermore, cooperation between customs and trade to engage in a process
to improve formalities and their participation in pilot initiatives is very beneficial.
An example is the national public–private alliance launched in Brazil in 2003 to
improve customs processes and facilitate trade.10 The following are some
approaches to simplification:

Legal Framework
A critical early step in the simplification process is a review of the legal framework
for customs. Many customs codes have not been updated for long periods of
time—in some cases, decades. To facilitate trade, the legal framework for customs
needs to be clear, concise, and transparent for all involved in trade. Most trade
facilitation measures require a basis in the legislative code to function. For exam-
ple, a PCA unit requires the authority to compel an importer to produce books
and records, the authority to conduct audits on traders’ premises, the ability to
assess and reassess duties and taxes, and the ability to levy fines and penalties. In
some developing countries, due to the existing code, the courts have determined
that customs cannot make these changes and the ability to make these adjust-
ments only exists at the point of entry. This means that goods are held at the
frontier or clearance office pending a decision by a customs officer, which slows
trade and increases costs.
Likewise, most older customs codes did not contemplate the existence of pro-
grams such as single window, TTP/AEO, and other trade facilitation measures or
e-commerce and e-payment measures, such as electronic signatures or the accep-
tance of digital documents (manifests, waybills, procurement orders, and so on).
Neither do they have provisions for administrative or civil penalty systems. A
frustrating trend in some customs codes is that all penalties are enshrined in the
legislation, and they are often seen as too lenient or too severe for the infraction
(that is, a $50 fine or five years in prison). These penalties seldom get updated
because of the significant time and effort that is required to get legislative changes
through parliament. A better practice, particularly for civil or administrative

10
For more information about this, see https://tfig.unece.org/cases/Brazil.pdf.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 115

penalties, is for the legislation to grant the authority to the minister responsible
for customs to create and maintain a penalty system through regulations. The
administration can then create a master penalty document or codex for a variety
of infractions and the penalties can be updated and reviewed on a periodic basis
without the need for an overhaul of the legislation. Many customs codes need
updating to meet international standards, such as the WTO TFA, as well as
reflecting the countries’ participation in regional trading blocs or customs unions
(Communauté Économique et Monétaire de l’Afrique Centrale [CEMAC] or the
Caribbean Community [CARICOM], for example).
The WTO TFA establishes in Article 2 that traders and other interested parties
must be given an opportunity and reasonable time to comment on proposals for
new trade-related and customs laws and administrative regulations as well as any
amendments thereto. Additionally, new or amended laws and regulations must be
made publicly available as early as possible before their entry into force.
As good practice, the European Union Customs Business Process Model (EU
BPM11) was created in 2010 upon request of the member-states’ customs author-
ities and the trade community in order to facilitate the reading of the newly
proposed legal provisions.12 It aims at a better understanding of the “TO BE” or
proposed future state as well as the impact of the changes to the customs processes
and procedures.

Single-Window Platform Initiatives

Single window is a whole-of-government enhancement related to trade. The
WTO TFA requires that “members shall endeavor to establish a ‘single window’
to which a trader can submit all documents and/or data required by customs and
all other border or licensing authorities for the import, export or transit of goods,
and from which the trader will receive all notifications” (Article 10.4). When
done well, it facilitates communication not only between the trader and the var-
ious government agencies but also among the agencies themselves, reducing
duplication and strengthening information management on behalf of many
departments. This tool coordinates reception of information for all government
agencies implicated at the border and shares information across those agencies.
This single point of contact reduces the requirement for traders and their repre-
sentatives to visit a multitude of government offices to secure a variety of licenses,
permits and authorizations.
The current technology allows for a web portal to upload required documents
and then to receive the various approvals electronically, while at the same time all
information is shared among the government departments participating, which
helps, among other purposes, improve risk management practices. This creates

11
For more reference, see https://ec.europa.eu/taxation_customs/customs-4/union-customs-code/ucc
-bpm_en.
12
In 2010, the EU drafted a New Modernized Customs Code (NMCC), nowadays known as Union
Customs Code (UCC).

©International Monetary Fund. Not for Redistribution

116 Customs Matters: Strengthening Customs Administration in a Changing World

seamless licensing for traders, reduces red tape, and shortens clearance times. As
part of the planning and implementation of a single window, it is important that
the government, together with the participating agencies, use it as an opportunity
to review and improve their processes to reduce the often burdensome and unnec-
essary requirement for licenses and permits that can be significant barriers to
trade. Unfortunately, we sometimes see that, despite the advertised presence of a
single window IT platform, the procedures do not work entirely as intended and
that paper copies are still required, which reduces the impact of this type of ini-
tiative on improving trade facilitation.
As mentioned, technology is an enabler of the single-window model, and a
variety of tools are available to administrations. Some of the challenges with
single-window initiatives are that sometimes customs is seen as almost an after-
thought to the process—the single window may be driven by the Ministry of
Trade or Finance, and customs is not at the table during the discussions on how
the process should work or how the information is to be treated. In some cases,
the single-window portal is held outside government with a contractor, and
importers or their agents can submit and change content of cargo manifests and
declarations without customs knowledge. This creates opportunities for fraud,
misclassification, and mis-valuation, among other risks. At a minimum, the single
window should be housed within government and preferably within customs.
Other departments and agencies should have access to the information they
require for decision-making without the ability to alter the record. A key principle
is that the declarations and documentation, once submitted, should not be
changed without creating a record of that change and an audit trail.
Another challenge for single-window initiatives is when all agencies that have
authority over the border do not participate in the single window. This occurs for
a variety of reasons, including a lack of technology or funding, an inability to link
with the single-window systems, a lack of regulatory framework to allow for deci-
sions to be made based on electronic documents, or other reasons. If all border
regulatory bodies are not participating, the efficacy of the single window will be
reduced, and trading will be slower. Additional references to consider while
implementing a single window platform for trade are (1) the WCO SW compen-
dium (WCO 2014), (2) the WCO Single Window Data Harmonization (WCO
2007), (3) Single Window Environmental Maturity (WCO 2007), and (4) the
UNCEFACT recommendation 33 (UNCEFACT 2005).

Coordinated Interagency Inspection

While customs is thought of as being responsible for managing the border, there
is a mixed bag of departments, agencies, and other regulatory authorities from
different levels of government at times (federal or state level, for example), which
have different powers over various aspects of the border. While this is not an ideal
situation, it is the reality that is faced by many administrations and provides a
challenge when implementing any trade facilitation measure. For example, the
immigration ministry has authority over the movement of people, including

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 117

ships’ crews and truck drivers. The Ministry of Health will control permits for
imports or exports of medications, medical samples, and so on. The Ministry of
Trade may have authority over certain goods under import or export quotas or
food inspection authorities. The difficulty is that each of these authorities can
cause a shipment to be held at the border or the customs release office. A coordi-
nated approach to inspection and release will reduce dwell time at border cross-
ings as well as costs for traders. To minimize delays, a variety of strategies can be
adopted.13
The first strategy is to determine who leads at the border. Since customs is
normally charged with the management of the border overall, it should have an
overall coordination role for inspections. All cargo crossing the border must be
reported to customs; therefore, customs is in the best position to identify which
cargo requires inspection, licenses, or permits. Likewise, customs can coordinate
inspections to ensure that all required authorities are present prior to opening the
shipment. This will reduce the costs and time associated with having to open a
container multiple times for various authorities.
Another strategy that has been successfully implemented by some countries has
been to legally delegate various authorities to customs to act on behalf of other
ministries. This can be in place for nontechnical inspections or to verify a permit or
license. Technical requirements, such as animal health, should continue to require
the relevant ministry’s expert. Also, there should be an increased focus on reviewing
pre-arrival information to identify which cargo requires inspection or review by
multiple authorities. In using this information, customs can coordinate who needs
to attend a physical inspection, and in this way, inspections can be coordinated and
requirements for release can be validated prior to the cargo arriving.
Finally, regarding further expediting of cross-border formalities, a customs-to-
customs bilateral agreement on conducting coordinated inspections at adjoining
borders is another solution. For instance, Guatemala has this in place with
Honduras and El Salvador and has a signed formal agreement with Mexico to
implement the same procedures.

Red Tape and Administrative Burden Reduction Strategies

Many countries are implementing “red-tape” reduction strategies with the overall
goal to reduce the administrative burden on business. Some jurisdictions have
enacted one-for-one legislation to cap the requirements of policies. A one-for-one
rule requires that for any new regulation to be added an existing regulation needs
to be removed so the overall number of regulations does not increase. The WTO
TFA sets the framework for customs formalities and documentation simplifica-
tion as outlined in Box 4.1.

13
For example, the WCO Coordinated Border Management Compendium can provide useful
guidance; for more information, see http://www.wcoomd.org/-/media/wco/public/global/pdf/topics
/facilitation/instruments-and-tools/tools/safe-package/cbm-compendium.PDF?la=en.

©International Monetary Fund. Not for Redistribution

118 Customs Matters: Strengthening Customs Administration in a Changing World

Box 4.1. WTO TFA Article 10.1 Formalities and Documentation

Requirements
With a view to minimizing the incidence and complexity of . . . formalities and to decreasing
and simplifying . . . documentation requirements . . . each Member shall . . . ensure, as
appropriate, that such formalities and documentation requirements are:
• Adopted and/or applied with a view to a rapid release and clearance of goods, partic-
ularly perishable goods;
• Adopted and/or applied in a manner that aims at reducing the time and cost of com-
pliance for traders and operators;
• The least trade restrictive measure chosen where two or more alternative measures
are reasonably available for fulfilling the policy objective or objectives in question;
and
• Not maintained, including parts thereof, if no longer required
The Committee (Committee on Trade Facilitation) shall develop procedures for the sharing
by Members of relevant information and best practices, as appropriate.

Source: WTO TFA Article 10.1 2014.

For many countries, customs transactions continue to be very bureaucratic.

UNCTAD estimated in 2014 that an average customs transaction required 20
to 30 different parties, 40 documents, 200 data elements (many that are repeat-
ed many times), and the complete rekeying of all data at least once (WTO
2020a).
Another red-tape reduction strategy is to have government departments review
all their documentary and data requirements to determine if each requirement
continues to be necessary or if it can be abolished. For example, in some cases
customs administrations require the bank that did the foreign exchange transac-
tion to validate the value of the goods to customs. The bank has no expertise in
customs valuation. This not only added no value to the process, but it hindered
the determination of the customs value. As an additional example, some develop-
ing countries require that exporting companies have certificates of origin
approved and signed by local government officials despite this not being a
requirement for the relevant free trade agreement. This action is time-consuming
and is an added cost to exporters without providing any benefit.
Countries also have enacted laws that prohibit public institutions from requir-
ing documents that are already in the possession of another public institution,
which promotes communication between government agencies and reduces the
administrative burden and costs for traders. It also helps government agencies to
streamline their procedures and promote foreign investments. In Central
America, Guatemala, El Salvador, and Costa Rica have laws of this nature that
apply both to customs administrations and to any other government agency.
The use of technology for customs processes is another strategy for reducing
administrative burden. A more comprehensive discussion of technology and cus-
toms is in Chapter 7. Most customs administrations have an automated system in
place, but unfortunately many administrations require traders to also produce

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 119

paper copies of the information submitted through electronic means. This is a

duplication and slows the entire process. The COVID-19 pandemic has been a
catalyst for many customs administrations to revisit this requirement, and they are
now making decisions based on electronic records.
Hand in hand with this is the use of technology “Customs should maximize
for inspection services—scanners and other tech- the use of technology for
nology to reduce the number of containers or
payment of duties and
cargo that need to be unloaded. It can be problem-
atic when administrations decide to scan all con- taxes and reduce the
tainers and fail to apply any risk controls to deter- requirements for paper let-
mine which ones should be inspected (either with ters of credit, checks, or
technology or physically). Many customs adminis- other means of payment.”
trations attempt to look at everything, either
through scanners or by physical inspection, leading to poor examination results
and long wait times for clearance and release as the resources required to inspect
100 percent of all imports is far beyond what any administration has available for
the task.
Modern technologies like artificial intelligence (AI) are being piloted by a few
advanced customs administrations to interpret scanning imagery accurately, min-
imizing human intervention and shortening processing times. At present, these
technologies are costly because sustainable systems are not fully developed, but
this is the trend for the future.
Technology in the ICT domain also includes advanced software packages that
customs administrations use behind the scenes. Whether off-the-shelf programs
like ASYCUDA World or a custom-designed program tailored to a specific
administration, investment in this form of technology is as important as technical
hardware. Training should be provided to all relevant staff to ensure that the full
capacity of the program is being utilized. An example of this is an accounts receiv-
able software to digitally record traders’ financial accounts with the administra-
tion. Proper usage of the software can ensure that all payments are being collected
on time, outstanding debt is identified quickly, and any refund to traders is pro-
cessed in a timely manner.
Although technology has significant benefits to accelerate processes, customs
administrations must be first focused on improving business processes. The tech-
nology would then be applied to such improvements instead of automating bur-
densome, obsolete procedures.
At the same time, customs should be looking at the level of approvals required
to clear and release shipments. In some jurisdictions, multiple approvals are
required to release cargo. Approval to clear and release goods should be delegated
to the lowest level possible, interventions should be based on risk, and shipments
of traders with good compliance histories should be released in the green lane.
The use of advance information is critical in determining risk and customs should
not wait until the shipment has arrived at the port or clearance center to begin
reviewing the shipping manifest or other information available prior to the filing
of a declaration. In fact, many countries have implemented pre-arrival clearance

©International Monetary Fund. Not for Redistribution

120 Customs Matters: Strengthening Customs Administration in a Changing World

protocols to reduce congestion at the border. It may not be possible to do pre-

arrival clearance in all jurisdictions; however, it is possible to begin screening for
risk and to develop the risk profile for the trader and the goods. Integrated risk
management is critical to reducing the level of customs intervention, and this
approach is detailed in Chapter 5.
Proper attention should also be given to minimizing the red tape in logistics
operators processes for the movement and release of cargo (for example, payment
of port fees and charges and so on). In this regard the benefits of developing and
implementing Port Community Systems (PCS) are a possible solution. According
to the European Port Community Association, “a PCS is an electronic platform
which connects the multiple systems operated by a variety or organizations that
make up a seaport, airport or inland port community . . . enabling intelligent and
secure exchange of information between public and private stakeholders in order
to improve the efficiency and competitive position of the sea and airports’ com-
munities. [It] optimizes, manages and automates smooth port and logistics pro-
cesses through a single submission of data and by connecting transport and
logistics chains” (EPCSA 2012).
A PCS can act as a national single window or be integrated into a national
single-window platform. A PCS can also be a precursor to the single window and
will reduce duplication of data input through efficient electronic exchange of
information.

Harmonization and Standardization

The harmonization and standardization trade facilitation pillars are closely linked
and complement each other. Opportunities for greater cross-border cooperation
between administrations are created by harmonizing processes, documents,
forms, and data requirements. Standardization creates policies, procedures, for-
mats, documents, and processes that are consistent within the administration.
When those standardized products conform to international standards, they
support cross-border harmonization.
The origins of the GATT, the WTO, and the WCO were all based on harmo-
nizing and standardizing trading rules and international trade processes. This
allows the system to work more efficiently for all participants.
National processes need to be aligned with international conventions, stan-
dards, and practices. An example of a harmonized and standardized process is the
Single Administrative Document (SAD) that is used for all declarations for the
European Union (EU) and the European Free Trade Association (EFTA) coun-
tries, also extending the usage to Turkey, the Republic of North Macedonia,
Serbia, and Albania. It allows for eight sections that are used depending on the
step in the importation/exportation process. This one document reduces red tape,
facilitates automation, and increases the reliability of trade data collected. A sim-
ilar case occurs with the Single Central American Customs Declaration (DUCA
by its acronym in Spanish), which is the document used in all imports, exports,

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 121

and transit of goods carried out within the region and that is accepted by the six
member countries from this region.

Harmonization of Procedures
A critical first step is for customs administrations to implement international
standards. Important references here are (1) WCO RKC (WCO 2006), which is
the blueprint for modern and efficient customs procedures in the 21st century (2)
WCO SAFE Framework of Standards (WCO 2018), which modernized supply
chain security standards; and (3) the WTO Customs Valuation Agreement
(GATT 1994), which standardizes how goods are to be valued for customs pur-
poses and outlaws the use of arbitrary or fictitious customs values. While the
implementation of various articles of the WTO TFA is currently ongoing, when
fully implemented, they will make the importing experience consistent among
trading partners and for traders worldwide.
Part of international standardization is the adoption of internationally accept-
ed definitions, weights, and measures. The importation and exportation of petro-
leum products are a good example; the international standard for these products,
which expand and contract significantly with temperature, is the volume correct-
ed for the product at 15 degrees centigrade. The adoption of international stan-
dards increases the predictability of trade costs for businesses.
While the sharing of trade and commercial
“
information between customs administrations has Memoranda of under-
been a feature for some time internationally, cross- standing can be developed
border information management speaks to closer between countries to pro-
working relationships among customs administra- vide the parameters of
tions to achieve a variety of ends. These can be for when and how informa-
enforcement purposes or for reducing redundan-
tion can be shared.”
cies and thereby making the customs process more
predictable for traders. Memoranda of Understanding or other mutual assistance
mechanisms can be developed between countries to provide the parameters of when
and how information can be shared. They should take national privacy laws into
consideration when they are developed as well as consider the type of information
that will be needed and in what format it should be shared.
The exchange of information ranging from export and import data to infor-
mation about the trader and the origin and value of the goods is another import-
ant tool of customs to customs cooperation that supports standardization. As this
information can be sensitive, the countries involved in the information exchange
agree to respect the confidentiality of the information. Also, these data exchanges
are based on the principle of reciprocity (UNECE 2020).
Many customs administrations have concluded Custom Mutual Assistance
Agreements (CMAA) to assist in combating fraud (WCO 2020). The WCO is
taking a lead role in expanding the bi-lateral agreements by undertaking “a com-
prehensive analysis of the potential to rationalize, harmonize and standardize the
secure and efficient exchange of information between WCO members” (WCO

©International Monetary Fund. Not for Redistribution

122 Customs Matters: Strengthening Customs Administration in a Changing World

2020). More information related to the international exchange of information

can be found in Chapters 3 and 6.

Harmonization of Standards and Norms

Non-tariff barriers to trade or technical barriers to trade (TBT) are technical
regulations, standards, and conformity assessment procedures that are sometimes
required in the import and export processes to protect human health and safety
or the environment. An example of this is the additional import requirements
under the Convention on International Trade in Endangered Species (CITES).
Signatories to the CITES convention require additional permits to import goods
associated with endangered species with the aim to ensure that international trade
in specimens of wild animals and plants does not threaten their survival (CITES
Secretariat 2020). This additional regulation makes the trade in endangered spe-
cies more difficult and in many jurisdictions carries serious consequences for
failing to comply. However, not all TBTs are benign; in some jurisdictions, addi-
tional requirements are added that in turn “thicken” the border, causing addition-
al delays and costs for traders. The international agreement that governs TBTs is
the WTO Technical Barriers to Trade Agreement, which has as its raison d’être to
ensure signatories implement technical regulations, standards, and procedures
that are nondiscriminatory and do not create obstacles to trade. The WTO TBT
promotes the use of international standards to facilitate trade in a transparent,
predictable manner (WTO 2020a). For customs administrations, this means
ensuring that no additional customs requirements are added to the processes that
would contravene the spirit of the WTO TBT.

Regional Transit of Goods

The ability to move goods through various jurisdictions is critical in the modern
global supply chain. The principle of freedom of transit is critical for many coun-
tries as their imports may pass through a multitude of territories in a duty-
suspended state and under a simplified transit declaration before reaching the
final destination where duties and taxes are assessed. National customs laws gov-
ern the movement of goods within the country whilst the cargo is under customs
control; however, goods that transit multiple international jurisdictions require
bilateral or multilateral agreements. These agreements stipulate how the goods
will be treated, what kind of declaration/documentation is required for transit,
whether any forms of security or guarantees are needed, and what technical
requirements need to be in place to transit the territory. Several international
conventions support the regional transit of goods, most notably the Customs
Convention on International Transport of Goods Under Cover of TIR Carnets
(TIR Convention 1975) (UNECE 1975), which created the framework for sim-
plifying and harmonizing the administrative formalities of international road
transport to facilitate international transit by simplifying customs transit proce-
dures as well as establishing an international guarantee system (UNECE 1975).
The TIR system has more than 30,000 authorized operators and is in use at
more than 3,500 customs and border control offices worldwide. As of May 2021,

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 123

a new legal framework for the full digitalization of the TIR system (customs-to-customs
advance TIR data) entered into force. The eTIR international system (customs to
customs pre-arrival information) ensures the secure exchange of data on the inter-
national transit of goods, conveyances, and containers according to the provisions
of the TIR Convention. The eTIR facilitates communication between national
customs systems and allows customs to manage the data on guarantees issued to
entities authorized as users on the TIR system (UNECE 2021).
Another solution for regional transit facilitation is the so-called “transit corri-
dors,” where transit procedures are standardized in the corridor covering multiple
jurisdictions. An example of this is the Central America transit system (Martincus
2017). With the support of the Inter-American Development Bank (IDB),
Central American countries adopted the International Goods in Transit (TIM,
acronym in Spanish), an electronic transit system to manage and control the
movement of goods in transit that is partially based on the European Union’s New
Computerized Transit System (NCTS).14
However, many developing countries continue to use customs escort services,
which are expensive, slow trade, and, unfortunately, invite rent-seeking behavior.
A key element of an efficient transit regime is the well-organized exchange of
information along with a well-designed system for guarantees.15
To improve this situation, modern tools are recommended, such as applying
radio-frequency identification (RFID) technology to means of transit and GPS
customs seals for containerized goods. These seals emit a signal that can be traced
from the customs office and if a shipment departs from its approved route, cus-
toms enforcement teams can be deployed to determine what has happened with
the cargo. Some countries have required that all trucks must be outfitted with at
least one of these traceability technologies so that customs can track their move-
ments. An important challenge that is still faced by some regions is the limitation
of ICT coverage within the whole region (GPS) or standardization of standards
and norms related to the devices utilized (RFID). In many instances, drivers are
given an approved route and customs will want to ensure that any detour is not
for prohibited purposes.
There are other tools that administrations can use, including additional guar-
antees for high-value, high-duty, or high-risk goods. For lower-risk goods, such as
bulk goods, a simpler verification can be conducted, such as weighing the truck
and trailer upon entry and again at destination or on exit to ensure there is no
significant change in the weight. Another good practice related to transit of goods
is to coordinate physical infrastructure at common border crossings; some coun-
tries have successfully shared infrastructure and have worked together to develop

14
For more on NCTS, see https://ec.europa.eu/taxation_customs/business/customs-procedures
-import-and-export/what-customs-transit/union-and-common-transit_en and https://unece.org
/fileadmin/DAM/trans/doc/themes/UNDAC2C/Geneva2016/Meszaros210616.pdf.
15
For more information, see the WCO Transit Guidelines at http://www.wcoomd.org/en/topics
/facilitation/instrument-and-tools/tools/transit-guidelines.aspx and the WCO Best Practice in Transit
Compendium at http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools/tools/transit
-compendium.aspx.

©International Monetary Fund. Not for Redistribution

124 Customs Matters: Strengthening Customs Administration in a Changing World

commercial only lanes, for example. In the Central American region, customs
agreed to accelerate the cross-border movement of goods in transit by defining
that only the country of entry applies customs controls and shares information
about results with the country of exit; the rest of the countries through which the
goods will pass in transit use a regional IT system. Additionally, the goods are
traced by applying RIFD technology to the means of transit.

Standardization
Standardization is achieved through various methods including regulatory coop-
eration, customs unions, and integrated data sharing with partner administra-
tions, to name a few. Two of these methods include joint border controls and
mutual recognition agreements.
With joint border controls, two neighboring customs administrations agree to
operate the customs crossing by coordinating export and import controls, having
synchronized opening and closing hours, and having similar competencies. For
example, both offices would deal with commercial shipments or personal small
shipments. Also, if a border crossing of one country is known to be used exten-
sively for exporting machine parts, the neighboring country can have officers who
are experts in machine part importations assigned to that crossing.
Mutual recognition agreements are, as mentioned above, specifically in relation
to trusted trader or AEO programs, in that a trader who is approved by one cus-
toms administration would be granted the same status in the second country (or
third, and so on, depending on the number of mutual recognition agreements
signed). This has the potential to expand program benefits more quickly for traders.
However, it continues to be a challenge for traders in some developing countries to
accrue any real benefits for participating in the AEO program. Often trusted trader
or AEO shipments, sometimes transferred to the “blue lane” (or trade facilitation
lane) are selected for additional inspection and the promised expediting at the
border is not as significant as expected. Customs administrations need to ensure
real benefits to traders and need to enforce sanctions against noncompliant partic-
ipants until they establish their “good citizen/trader” behavior again.
In the context of customs unions, the recommended approaches to standard-
ization are, among others, regional customs legislation; recognition of non-tariff
requirements; payment of taxes and distribution of incomes; and integration of
customs operations at the border such as the juxtaposed model, binational customs
offices, peripherical offices, double header office, and so on. For example, in Latin
America, there are at least three customs union examples with different levels of
integration: Mercosur,16 Andean Community,17 and Central American Integration.18

16
Mercosur countries and associated states: https://www.mercosur.int/en/about-mercosur/mercosur
-countries.
17
Andean Community members and associated states: https://www.comunidadandina.org/quienes-
somos.
18
Central American Integration System: https://www.sica.int/sica/vista_en.aspx.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 125

CONSIDERATIONS IN PREPARING A ROADMAP

FOR TRADE FACILITATION
An administration looking to add trade facilita- “It is vital that customs be
tion measures should consider several things. on the NTFC as the lead
While the customs administration may not be the government organization
only agency involved, it will certainly be a main
responsible for border
contributing partner. It will be involved in most
initiatives and, as such, needs to have a clear idea related TFA measures.”
of what it will be expected to contribute over what
time frame and what funds will be expected from its budget.
The establishment of a national trade facilitation committee (NTFC), as the
overarching steering committee, is a critical step in planning and implementing
trade facilitation measures. It is extremely important that customs be on the com-
mittee as the lead government organization responsible for border related TFA
measures and a key player in advising on related TFA measures in other govern-
ment departments. It is important to determine the government and public
bodies who have a role in trade facilitation at the beginning of this process and
include them as permanent members in the  NTFC.  Clear reporting structures
and communication methods should be established at the outset along with clear
terms of reference to formalize these processes.19
The NTFC can be leveraged to build stakeholder engagement into the design
and development of new policies by including a diverse membership. A dedicated
unit within customs can act as a repository and resource for all trade facilitation
projects and as a project management office, to hold lessons learned, key findings,
and best practices. This is important knowledge that should not be lost with a
change in government or committee leadership.
The notification instruments prepared for the WTO upon ascension into the
TFA can be used to establish timelines for key TFA measures. Starting with small,
easy to implement initiatives will ensure that progress is visible and momentum
is maintained. Capacity building and technical assistance can be requested in
areas that already have been identified as major initiatives needing expert advice.
It may seem an overwhelming task; however, customs administrations do not
have to reinvent the wheel or attempt wholesale change in isolation. Many orga-
nizations have resources available and capacity-building assistance that can be
accessed to assist in implementing different projects.
Organizations like the IMF, the WTO, the WCO, and UNCTAD all have
various means to support the implementation of trade facilitation measures.
Information about what is available to member-states can be found on the

19
More guidance for developing countries to better evaluate the policy, organizational, and fund-
ing options for NTFCs that best suit their circumstances can be found at https://www.intracen.org
/uploadedFiles/intracenorg/Content/Publications/2014-2015-324%20-%20National%20Trade%20
Facilitation%20Committees_Low-res.pdf.

©International Monetary Fund. Not for Redistribution

126 Customs Matters: Strengthening Customs Administration in a Changing World

organizations’ websites or by contacting each organization directly. For example,

the World Bank Group (WBG) Trade Facilitation Support Program (TFSP) was
launched in 2014 to assist developing countries in aligning their trade practices
with the WTO TFA. The program is designed to provide practical and demand-
driven assistance and supports developing member-states in trade facilitation
reform and harmonization of systems and procedures in line with international
standards covering import, export, and transit activities.20
Best practices from other jurisdictions can be adapted and modified to fit a
specific administration’s operational environment.
An internal diagnostic review of the current state of trade facilitation measures
can be helpful to acknowledge where the administration is, determine where it
wants to be, and chart a course on how to get there. Having a solid framework
established at the beginning of the planning process will help to ensure that all
initiatives are working together towards a common objective. This will assist the
administration to highlight capacity building funding requests and seek for sup-
port from available international capacity building programs.
Time-release studies are an important tool to identify bottlenecks, unnecessary
documents, and requirements and make a clear identification of responsibilities
between the various stakeholders participating in the customs clearance process.
Based on the outcome of these studies, a national action plan is defined in order
to improve trade facilitation measures. For this purpose, the WCO has developed
a methodology and IT tools to help countries conduct this study, which would
be an important part of a national roadmap for trade facilitation (WCO 2018).
As projects are implemented and completed, it is important to report the
results back to the NTFC. The NTFC will monitor progress of initiatives, ensure
obstacles such as funding or partner collaboration are addressed, update the road-
map as changes occur, and make course corrections as necessary. Program evalu-
ation after completion can review any issues or unintended consequences to for-
mulate lessons learned and inform the creation of future policies.
It is important to point out the relevance of incorporating the TFA roadmap
into the customs strategic plan. This will ensure monitoring of its implementa-
tion as part of a customs modernization agenda.
From a customs modernization perspective, implementation of sound risk
management and compliance enforcement systems are critical to the success of
any trade facilitation measure. (Integrated risk management is discussed in fur-
ther detail in Chapter 5.) Many customs administrations in developing countries
have immature or ineffective risk management systems or inadequate compliance
enforcement mechanisms in place, making verifying the compliance of traders
difficult. In some cases, administrations do not have the capacity or are not
equipped to receive or process pre-arrival information on cargo making clearance
in advance of the goods arrival difficult or impossible. Customs administrations

20
For more on the program, see https://www.worldbank.org/en/programs/trade-facilitation-support
-program.

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 127

with advanced risk management systems operate with more than 90 percent of
transactions released on the green channel. Advanced information processing
capacity allows customs to expedite clearance so that traders can remove cargo
soon after the goods, arrival, reducing time and costs of importing.
Another effective trade facilitation measure implemented by some advanced
customs administrations is the separation of release and final determination. This
can be achieved by separating the clearance process into two steps (for example,
US, Canada, New Zealand): immediate release, based on a minimum set of data
requirements; and the final determination and payment, after the release based on
a comprehensive customs declaration (or even considering the possibility of con-
solidated declaration for multiple transactions filed on a periodic basis).

SUMMARY
It is important to remember the four trade facilitation pillars when planning and
implementing initiatives: transparency, simplification, harmonization, and stan-
dardization. Trade facilitation (TF) measures should be well planned and coordi-
nated with other governmental agencies acting at the border and with active
participation of traders and other stakeholders.
Using the WTO TFA to identify articles that are currently being met, those
that are easily addressed, and those that will require more advanced interventions
will help create the framework for progress. The TF roadmap should be incorpo-
rated into the customs strategic plan and be monitored as part of the customs
modernization agenda. Monitoring results will ensure steady incremental prog-
ress. Strong and consistent leadership will guide implementation.

REFERENCES
Canada Border Services Agency (CBSA). 2020. CBSA Service Standards 2020–2021. 11 30,
2020. https://cbsa-asfc.gc.ca/services/serving-servir/standards-normes-2020–2021-eng.html.
Canada Border Services Agency (CBSA). 2021. Contact Border Information Services. 07 08,
2021. https://cbsa-asfc.gc.ca/contact/bis-sif-eng.html.
CITES Secretariat. 2021. “What Is CITES?” https://www.cites.org/eng/disc/what.php.
Gnogoue, Roger-Claver Victorien. 2017. “Mirror Analysis, A Risk Analysis Support Tool for
Customs Administrations: WCO News 82, Dossier.” WCO News, February 2017.
Grainger, A. G., J. M. Rundle, and S. R. Ahsen. 2019. “Customs and Humanitarian Logistics.”
Global Trade and Customs Journal 14 (4).
Hartzenberg, Trudi. 2020. “The African Continental Free Trade Area Agreement—What Is
Expected of LDCs in Terms of Trade Liberalisation?” United Nations LDC Portal: International
Support Measures for Least Developed Countries. https://www.un.org/ldcportal/afcfta-what-is
-expected-of-ldcs-in-terms-of-trade-liberalisation-by-trudi-hartzenberg/.
Hassan, Mena, Gbadebo Odularu, and Musibau Babatunde. 2020. “Trade Relations, Business
Opportunities and Policy Instruments for Fostering Africa’s Trade.” In Fostering Trade in
Africa. Cham: Springer Nature Switzerland.
International Monetary Fund (IMF). 2003. Changing Customs: Challenges and Strategies for the
Reform of Customs Administration. Washington, DC: IMF.
International Monetary Fund (IMF). 2018. Review of 1997 Guidance Note on Governance—A
Proposed Framework for Enhanced Fund Engagement. Washington, DC: IMF.

©International Monetary Fund. Not for Redistribution

128 Customs Matters: Strengthening Customs Administration in a Changing World

International Monetary Fund (IMF). 2019. Fiscal Monitor: Curbing Corruption. Washington,
DC: International Monetary Fund.
International Monetary Fund (IMF). 2020a. “Priority Measures for Customs Administrations.”
IMF COVID-19 Special Series, Washington,  DC.  https://www.imf.org/Publications
/SPROLLs/covid19-special-notes.
International Monetary Fund (IMF). 2020b. “Tax and Customs Adminstration Responses.” MF
COVID-19 Special Series, Washington, DC.
Martincus, Christian Volpe. 2017. “Electronic Transit System Boosts Central American Trade.”
WCO News 84. https://mag.wcoomd.org/magazine/wco-news-84/electronic-transit-system
-boosts-central-american-trade.
Ministerio de Hacienda. 2021. Aduanafacil. http://www.hacienda.go.cr/aduanafacil.
Moïsé, Evdokia, and Silvia Sorescu. 2013. “Trade Facilitation Indicators: The Potential Impact
of Trade Facilitation on Developing Countries’ Trade.” OECD Trade Policy Paper 144, Paris.
Montagnat-Rentier, Gilles. 2019. Revenue Administration: Short-Term Measures to Increase
Customs Revenue in Low-Income and Fragile Countries. Washington, DC: International
Monetary Fund.
Organisation for Economic Co-operation and Development (OECD). 2020. OECD: Trade
Facilitation. https://www.oecd.org/trade/topics/trade-facilitation.
Sakyi, Daniel, and Sylvanus Kwaku Afesorgbor. 2019. “The Effects of Trade Facilitation on
Trade Performance in Africa.” Journal of African Trade 1–15.
UN Economic Commission for Europe (UNECE). Trade Facilitation Implementation Guide.
June 7, 2020. http://tfig.unece.org/contents/org-unece-with-uncefact.htm.
UN/CEFACT. “Recommendations and Guidelines on Establishing a Single Window.” UNECE.
2005. https://unece.org/DAM/cefact/recommendations/rec33/rec33_trd352e.pdf (accessed
January 14, 2022).
UN Global Survey on Digital and Sustainable Trade Facilitation. Trade Facilitation & Paperless
Trade. 2019. https://untfsurvey.org/.
UN  UNECE. “Customs and cross-border management.” Trade Facilitation Implementation
Guide. 06 13, 2020. https://tfig.unece.org/contents/intro-domain-cbm.htm (accessed
January 13, 2022).
UNECE. “Electron TIR framework enters into force across globe in huge boost to trade facilt-
ation.” UNECE Sustainable Developement Goals. May  25, 2021. https://unece.org/media
/transport/TIR/press/356719 (accessed January 13, 2022).
—. “Legal instruments in the field of transport; Customs Convention on the Internaituonal
Transport of Goods under Cover of TIR Carnets (TIR Convention.” UNECE Sustainable
Development Goals. November  1975. https://unece.org/legal-instruments-field-transport-28
(accessed 01 13, 2022).
—. 2012 Trade facilitation Implementation Guide. https://tfig.unece.org/details.html#:~:text
=The%20fundamental%20principles%20of%20trade,simplification%2C%20harmoniza-
tion%2C%20and%20standardization (accessed January 14, 2022).
—. Trade Facilitation Implementation Guide. November  2012. http://tfig.unece.org
/details.html#:~:text=The%20fundamental%20principles%20of%20trade,simplifica-
tion%2C%20harmonization%2C%20and%20standardization.
UNECE UN/CEFACT. 2013. “The Single Window Concept.” Trade Facilitation Implementation
Guide. http://tfig.unece.org/contents/single-window-for-trade.htm.
United Nations (UNECE). 2020. “The Single Window Concept.” United Nations. http://tfig
.unece.org/contents/single-window-for-trade.htm.
World Bank. 2020a. Doing Business: Measuring Business Regulations. Washington, DC: World
Bank. https://www.doingbusiness.org/en/data/exploretopics/trading-across-borders.
World Bank. 2020b. The World Bank Group’s Response to the COVID-19 (Coronavirus) Pandemic.
2020. https://www.worldbank.org/en/who-we-are/news/coronavirus-covid19.
World Customs Organization (WCO). 2007. “WCO Data Model, Single Window Data
Harmonisation.” WCO, Brussels, Belgium. http://www.wcoomd.org/-/media/wco/public

©International Monetary Fund. Not for Redistribution

 Chapter 4 Customs in a World of Enhanced Trade Facilitation 129

/global/pdf/topics/facilitation/instruments-and-tools/tools/data-model/data_harmonisation
.pdf?la=en.
World Customs Organization (WCO). 2014a. “Mercator Programme: A Navigational Map for
Trade Facilitation.” WCO, Brussels, Belgium. http://www.wcoomd.org/en/topics/wco
-implementing-the-wto-atf/mercator-programme/tailor-made-track.aspx.
World Customs Organization (WCO). 2014b. “WCO Compendium Single Window Services.”
WCO. http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/facilitation
/instruments-and-tools/tools/single-window/sw-compendium-supplement-edition.pdf?la=en.
World Customs Organization (WCO). 2018. “Time Release Study—Version 3.” WCO,
Brussels, Belgium. http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools
/tools/time-release-study.aspx.
World Customs Organization (WCO). 2020a. “AEO Compendium.” WCO, Brussels,
Belgium. http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/facilitation
/instruments-and-tools/tools/safe-package/aeo-compendium.pdf?db=web.
World Customs Organization (WCO). 2020b. “Globally Networked Customs.” WCO,
Brussels, Belgium. http://www.wcoomd.org/en/topics/facilitation/activities-and-programmes
/gnc.aspx.
World Customs Organization (WCO). 2020c. “SAFE Framework of Standards.” WCO,
Brussels, Belgium. http://www.wcoomd.org/-/media/wco/public/global/pdf/topics
/facilitation/instruments-and-tools/tools/safe-package/safe-framework-of-standards.pdf?la=en.
World Customs Organization (WCO). 2020d. The Revised Kyoto Convention. WCO, Brussels,
Belgium. http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools/conventions
/pf_revised_kyoto_conv.aspx.
World Customs Organization (WCO). 2020e. WCO SAFE Package. WCO, Brussels, Belgium.
http://www.wcoomd.org/en/topics/facilitation/ instrument-and-tools/frameworks-of
-standards/safe_package.aspx.
World Customs Organization (WCO). 2020f. “WCO Secretariat Note: What Customs Can Do to
Mitigate the Effects of the COVID-19 Pandemic.” WCO, Brussels, Belgium. http://www
.wcoomd.org/-/media/wco/public/global/pdf/topics/facilitation/ activities- and
-programmes/natural-disaster/covid_19/covid_19-categorization-of-member-input_may-29-2020
_edition-4_en.pdf?la=en.
World Trade Organization (WTO). 2013. “Briefing Note: Trade Facilitation—Cutting ‘Red
Tape’ at the Border.” WTO 9th WTO Ministerial Conference, Bali, Indonesia. https://www
.wto.org/english/thewto_e/minist_e/mc9_e/brief_tradfa_e.htm.
World Trade Organization (WTO). 2015. “World Trade Report 2015—Speeding Up Trade:
Benefits and Challenges of Implementing the WTO Trade Facilitation Agreement.” WTO,
Geneva, Switzerland.
World Trade Organization (WTO). 2020a. “Customs Valuation.” https://www.wto.org/english
/tratop_e/cusval_e/cusval_e.htm.
World Trade Organization (WTO). 2020b. “Technical Barriers to Trade.” https://www.wto.org
/english/tratop_e/tbt_e/tbt_e.htm.
World Trade Organization (WTO). 2020c. “WTO Trade Facilitation Agreement Facility.”
https://www.tfafacility.org/article-1.

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

 CHAPTER 5

Strengthening the Core Customs

Processes through Integrated Risk
Management
Augusto Azael Pérez Azcárraga and Rossana San Juan

This chapter presents integrated risk management (IRM) as an approach for

customs administrations to strengthen customs controls while encouraging eco-
nomic operators’ voluntary compliance and supporting improved trade competi-
tiveness. The adoption of IRM requires a change in mindset from the way a
traditional customs administration operates. It introduces several key components
that must be implemented at the enterprise level to achieve benefits and ensure
compliance across the trade community. This involves a holistic and comprehen-
sive view across organizational units and functions to develop a strategic vision,
manage data and information, adopt new IT systems and technologies, update
processes, relocate human resources, and potentially implement legal and regula-
tory changes. Introducing an IRM approach is the foundation to improved
decision-making and compliance.
The chapter also discusses why risk management has not, for many customs
administrations, improved operator compliance or provided significant trade
facilitation benefits. It introduces the critical strategic components that are the
basis to support proper operational functioning in customs. This is followed by a
practical guide for customs to identify control gaps by comparing the current
performance against good practices under each core customs process, thus aiding
the administration to develop its own roadmap for improvement. Finally, it
encourages customs administrations to optimize data usage to improve trade
facilitation measures and mitigate a range of threats, providing detailed guidelines
on how to achieve both objectives.
The chapter encompasses valuable insights garnered from the significant prac-
tical experience of IMF customs experts through their work to support and
strengthen members’ capacity and that assists to adapt their processes to several
international policy instruments and tools.1

1
The WTO’s Trade Facilitation Agreement (WCO 2013), the ISO 31000:2009 (ISO 2019), the
WCO’s Revised Kyoto Convention (WCO 2002), the WCO’s SAFE Framework of Standards to
Secure and Facilitate Global Trade (WCO 2005), and both volumes of the WCO’s Risk Management
Compendium (WCO 2012a, 2012b).

131

©International Monetary Fund. Not for Redistribution

132 Customs Matters: Strengthening Customs Administration in a Changing World

RISK MANAGEMENT AND ITS RELATIONSHIP

TO CUSTOMS CORE PROCESSES
Currently, all customs administrations apply risk management—at least in
theory—as a driver of their business. Most international customs good practices
highlight the importance of applying risk management as a fundamental pillar for
the proper implementation of adequate controls and to facilitate legitimate trade.
Regardless of this commitment to risk management, it appears that many customs
administrations have yet to succeed in advancing to a mature risk management
system. Therefore, the two critical questions to ask are (1) How many customs
administrations have in place a functioning institutional strategy of integrated risk
management? and (2) Why, in many cases, the risk management systems have failed
to strengthen customs controls, and improve trade facilitation and compliance?
Demand for technical assistance on this subject and insights garnered by work-
ing with IMF member countries confirm that there are still many customs admin-
istrations that have not been able to fully implement risk management. Adequate
risk management requires the adoption of a structured and systematic process of
identification, analysis, assessment, prioritization, and treatment of risks. This is
dependent on a comprehensive vision to address institutional and compliance risks
while working with the available resources in their current customs context.
Risk management is commonly limited to the
“It is recommended to con-
application of risk criteria or selectivity criteria
during the processes leading to the release of stantly review the existing
goods. In many cases, this approach focuses only risk management approach
on the detection of formal irregularities or on and focus on developing a
applying minor value adjustments—on occasion vision beyond selectivity
without applying penalties. These actions are fre- related risk criteria.”
quently carried out as transactional, isolated cases
with no comprehensive strategy or oversight of the final results, thus generating
limited or no improvement in operators’ compliance. This reaches extremes when
some customs administrations continue to identify the same irregularities—
customs offenses—perpetrated by the same traders without ever questioning the
lack of improvement to compliance. In addition, some customs administrations
do not question why certain sectors and/or economic operators seem to never be
subject to any controls. There is an apparent myopia about the evolving economic
operators’ behaviors as well as the involved goods that may pose a greater threat.
Furthermore, some customs administrations consider that a reduction of selec-
tivity rates—yellow/orange and red channels—is sufficient to be viewed as modern
and aligned with good international risk management practices. And although
reaching this goal is fundamental within risk management, customs administra-
tions must also tackle the effectiveness of results as well as the implementation of
other measures that collaterally contribute to improving compliance with customs
rules. For example, customs must achieve the development of complete and reliable
cargo traceability, a robust post clearance audit function, and an institutional cul-
ture based on efficient use of data as a backdrop to decision-making. Unfortunately,
these conditions are still not being met in many cases. Layered on top are a series

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 133

of myths and/or false assumptions about risk management that tend to distract
from an integrated focus (see Box 5.1).

Box 5.1. Risk Management Myths versus Reality

MYTH: The definition, development, and REALITY: IRM is a responsibility of the

implementation of an IRM strategy is the entire organization, which should be fully
sole responsibility of an administrative engaged with the objective of improving
unit within the organization. the customs compliance of the trading
community.
MYTH: Risk management starts when the REALITY: Effective IRM covers all phases of
customs declaration is submitted. the customs cycle and includes measures
prior, during, and after the release of goods,
including through the legal period of
customs review.
MYTH: The selectivity module of the REALITY: Selectivity modules are very import-
customs IT systems should be the central ant; however, they only affect in-line controls
element of IRM. of cargo; therefore, they must be comple-
mented by other pre- and post- release mea-
sures, as well as the strengthening of techni-
cal capacities and integrity of customs staff
involved during customs clearance.
MYTH: The more physical inspections REALITY: According to the identified risk, the
performed at the point of entry, the appropriate treatment or action must be
better the results. applied, before, during, or after the release of
goods. Applying high rates of physical inspec-
tions without adequate risk management
tools tend to be a waste of scarce resources,
raising costs for both customs and traders
while also increasing unnecessary delays.
MYTH: The private sector cannot and REALITY: The compliant private sector can
should not participate in customs IRM. and should be a strategic partner with cus-
toms in the implementation of an IRM
approach; examples of this are compliance
and facilitation programs such as AEOs.
Regular exchanges and meetings with the
private sector allow customs to identify new
risk profiles and recognize changing trends.
Source: Authors.

The figures in Figure 5.1 garnered through the international survey on cus-

toms administrations (ISOCA)2 demonstrate some interesting trends in risk
management in 2017. Taken together, the figures show for many countries a
reported high use of risk management yet also a high reliance on strong control
at the release point.

2
The ISOCA survey is a joint effort between the IMF and the WCO to collect information about
the customs services of member countries through an IT platform; 51 countries participated in its
first version launched in June 2019 and finalized in June 2020.

©International Monetary Fund. Not for Redistribution

134 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 5.1. Progress on the Application of Risk Management

On average, about 70 percent of customs report having . . . and over 90 percent indicate they have in place
an institutional risk management policy . . . procedures for its handling.
1. Enterprise-wide risk policy exists 2. Formal approach for identifying, assessing
and prioritizing key compliance risks exists
90%
80% 100%
80%
Average "yes" rate responses

Average "yes" rate responses

70% 90% 100%
73% 93%
80% 88%
60%
58% 70%
50%
60%
40% 50%
30% 40%
30%
20%
20%
10% 10%
0% 0%
Low Income Emerging Markets Advanced Low Income Emerging Markets Advanced
Economies Economies

However, as shown below, formal risk management efforts are not always reflected in selectivity percentages.
3. Average selectivity channel by economic group
An institutional policy and a structured and systematic
100% risk management process should yield tangible
90% 17% benefits in trade facilitation and control.
80%
70% 58% Relying on high percentages of physical inspections
does not ensure better results and can lead to
60% 45% the following:
87%
50%
40% • Greater discretion and more opportunities for
17% malfeasance (corruption cases)
30%
• Lower quality analysis of physical and documentary
20% 38% examinations
10% 25% 3% • An increase in release times, and higher costs for
9% the private sector (hampering competitiveness)
0%
Low Income Emerging Markets Advanced
Economies
Only documentary examination Physical inspection No examination

Source: International Survey on Customs Administration (ISOCA) co-managed by the IMF and the WCO,
2019–2020.

The main challenge of any customs administration is being able to fulfill its
key mandates in the face of an ever-increasing volume of international trade—
especially in a complex setting that is under constant and varying demands from
users. This difficult environment in which they operate is in turn conditioned by
a series of internal and external threats. Chapters 2, 3, and 6 in this book also refer
to some of these. Among them, we may find the following:
• Constraints on infrastructure, budgetary, technological, and human resources
• High turnover of management personnel, stemming from both changes in
governments and an absence of policies allowing for adequate talent retention
• Weak human resources capabilities
• Corruption
• Administrative, fiscal, and trade policies, that is, suspensive regimes, exemp-
tions, free-trade zones, preferential treatment agreements, indirect/special

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 135

taxes, and duties, that in many cases are dif- “An effective adoption of
ficult to administer and sometimes have not IRM must address both
shown substantial benefits for the economy internal and external
• High informality threats that could hinder
• Low compliance by traders the organization’s optimal
• Forms of fraud that are diverse and constant- performance.”
ly evolving that undermine revenue, protec-
tion, and the safety of society
Further complicating this operating environment, customs administrations
must respond to the increasing demands of the trading community and the pub-
lic for simplification, transparency, procedural predictability, and both time and
cost reductions. Since the COVID-19 pandemic, social distancing has become
extremely important, emphasizing the need to accelerate automation. While
faced with the aforementioned challenges, revenue collection functions must not
be ignored; in some low- and medium-income countries, these represent up to
40 percent or more of overall total tax revenue. Also, customs must remember its
role in the security and protection of society.
Adopting an IRM approach enables customs to comprehensively address cur-
rent challenges; however, this approach requires a change in mindset from the way
a traditional customs administration operates, as it encompasses new ways of
managing data and information, IT systems, processes, and resources as well as
legal and regulatory changes in many cases. It brings together the risk concerns
and contributions from all relevant units within the customs administration and
its partner government agencies, mainly the tax administration and other border
control agencies. Therefore, building and implementing an IRM approach is not
an easy task technically, politically, and operationally, but it certainly is worth
pursuing as it enriches significantly the country’s capacity to detect and address
risk in its foreign trade transactions. The IRM approach should set out in detail
how the customs administration intends to respond to those risks, preferably with
the support and contributions from the other competent agencies.
The IRM’s purpose is therefore to identify and respond to the most significant
risks through a range of measures aimed first at identifying and prioritizing them
and then at correcting their underlying causes with a view to increasing voluntary
compliance across the economic operators’ population. In doing so, it must give
a clear indication of what needs to be done, who will do it, how, and when. It
should be prescriptive enough for all participating units to ensure compliance,
but at the same time allow some room for units to develop detailed subplans
appropriate to their environment and mandates. Aligning objectives, expected
outcomes, and milestones is very useful for this purpose. In support of the above,
it is also essential to understand the total population of importers and exporters
through a clear segmentation based on their relative importance in terms of CIF/
FOB value and risk level associated, in order to be able to apply the most suitable
treatment to each segment of traders—this chapter provides further details on this
matter below. Among other advantages, adoption of IRM allows for (1) resource

©International Monetary Fund. Not for Redistribution

136 Customs Matters: Strengthening Customs Administration in a Changing World

optimization, (2) quicker response to changing circumstances, (3) ensuring risk

treatment strategies are applied on the basis of their priority, (4) improving
decision-making impacts to achieve the overall institutional strategic objectives,
and (5) improving predictability and facilitation for the business-trade
community.
Failing to adopt IRM negatively affects the “The adoption of an IRM
efficiency of facilitation and control actions.
approach has the potential
Likewise, the administration will not be able to
identify and respond to the most significant to significantly strengthen
threats in trading patterns and within the trade core customs processes,
community. It is fairly common to observe con- thus improving trade facil-
trol actions that do not follow a strategy designed itation and voluntary
to prevent and mitigate the risks underlying each compliance.”
of the main processes. Furthermore, control
actions do not usually focus on different groups of
importers and/or exporters on the basis of segmentation and risk level. This
undermines the overall effectiveness of said actions, thus failing to induce import-
ers and other economic operators to modify their behavior and improve their
compliance.
It is necessary to understand that IRM is a dynamic and iterative process that
cuts across the organization. Its implementation can only be gradual, which, on
occasion, leads customs to desist from undertaking profound changes when
immediate results cannot be achieved. However, failure to do so will delay cus-
toms modernization and increase the cost of overcoming root problems that
curtail substantial improvement of main processes.
The New Zealand Customs Service is a well-recognized customs administra-
tion and a good example of a customs administration that has evolved its tradi-
tional risk management approach to an integrated one. Among other lessons it
has shared with the customs community, which are aligned with the IRM
approach presented in this chapter, the following are worth noting (Foley and
Northway 2010):
• Risk management refers to the culture, processes, systems, and structures
developed to manage potential risks and their adverse effects, and must
address a range of issues at each stage.
• Implementing risk management requires trust in a customs administration’s
processes.
• It is a way of thinking that moves a customs administration toward
proactive—rather than reactive—border management.
• Risk management should be viewed as a continually evolving process.
• Risk management, including intelligence and operations, must rest on mod-
ern legislation that enables information collection and sharing, including
internationally where appropriate, and should reflect changing risk manage-
ment processes.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 137

• Effective processes require well-trained staff, suitable systems, knowledge

transfer between domestic agencies, and international collaboration and
must also be subject to checks and balances.
Concluding that an IRM approach is an adequate way to address the present
challenges, it is necessary to have awareness of the importance of organizational
performance, which is divided into strategic functioning and operational func-
tioning. While the former has the treatment of institutional threats or threats
intrinsic to the organization as an objective, the latter focuses on the mitigation
of compliance risks of the core processes. Typically threats to strategic functioning
are addressed through governance and management policies, while threats to
operational functioning are addressed through a compliance program.
Figure 5.2 summarizes the key components of the IRM approach to improve
the main customs processes. This approach will be expanded upon in greater
detail throughout this chapter. Analyzing each of these components will help the
customs administration define and articulate its own IRM approach.

Figure 5.2. Key Components for Strengthening Core

Processes Using an IRM Approach
1. Strategic vision 2. Organizational performance
Risk management is a fundamental pillar for the proper Its effective adoption depends on the
implementation of adequate controls and to facilitate trade. capabilities and performance of the organization . . .

Knowledge of
the environment
Strategic
functioning

Risk Preventive Operational

Committee focus functioning

Data Technology
optimization adoption

3. Institutional and compliance risk within processes

. . . as well as having a systematic methodology in place for identification, analysis, assessment,
prioritization, and treatment of the main risks.

Core processes or streams

Prior actions Cargo management Customs clearance Post-clearance audit

Legal framework Transparency and integrity

Institutional
risks

Governance and organization Resources and capacity

Information and Technology

Valuation Origin
Compliance

Tariff classification Prohibited goods

risks

Non-tariff regulations Intellectual property

Smuggling

4. Structural elements 5. Data usage optimization

To achieve this, it is important to know the main
. . . as well as develop different measures and tools to
vulnerabilities and their gaps against the good
identify and target the core variables of analysis.
practices of each process, under each
©International
structural element ... Monetary Fund. Not for Redistribution
 risks
Non-tariff regulations Intellectual property

138 Customs Matters: Strengthening Customs Administration

Smuggling in a Changing World

4. Structural elements 5. Data usage optimization

To achieve this, it is important to know the main
. . . as well as develop different measures and tools to
vulnerabilities and their gaps against the good
identify and target the core variables of analysis.
practices of each process, under each
structural element . . .
Variables
Goods Customs
regimes
Legal
Information Processes
framework Operators

Human Compliance
IT systems Infrastructure records
resources
Risk
profiling
Segmentation

Data analysis techniques

6. Treatments 7. Trade facilitation and control strategies

Finally, it is crucial to select the most suitable risk . . . which must address the underlying causes of
treatment . . . noncompliance and existing operational
capabilities to act in a timely manner.
• Greater trade facilitation
• Futher guidance
Preventive measures
• Physical controls
• Documentary controls
Operational
• Nonintrusive controls Customs clearance measures
capabilities
• Post-clearance audit
• Suspension/cancellation
Post-release measures
• Prosecution

Source: Authors.

KEY COMPONENTS FOR SUSTAINED

STRATEGIC FUNCTIONING
Strategic Vision for IRM
Customs administrations must evolve to be “Developing a comprehen-
dynamic and able to face the constantly changing sive vision linked to IRM is
environment in which they operate. Preparation
key to properly guide the
for this context requires developing integrated
approaches and incorporating risk management modernization reforms of a
into institutional policies. According to customs administration.”
Widdowson and Holloway (2011), “The manage-
ment of risk is integral to any management process and, as
such, should not be regarded as something that is done in isolation from an orga-
nization’s management framework. Many customs make the mistake of treating
risk management as a separate activity that is carried out in ignorance of other
functions.” Box 5.2 shows some key concepts and strategic directives for develop-
ing this objective.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 139

Box 5.2. Risk Management Strategic Guidelines

• Risk management must be part of the strategic plan (SP), which must be adopted at
the highest level and clearly reflected in the institutional policy.
• Projects and measures for prevention, mitigation, and treatment of risks must be part
of strategic projects defined in the SP.
• It has to be acknowledged that risks must be faced by the institution as a whole. This
implies that all areas should articulate and coordinate toward the application of IRM.
• Institutional and compliance risks must be addressed holistically, which is to say with
a thorough understanding of how they correlate and are interdependent.
• IRM application requires knowledge of the customs and trade environment, the
actors, goods, and customs regimes within which they interact.
• A coordinated framework with other government agencies, the private sector, and
other customs administrations must be in place.
• Key indicators must be established for analysis in order to monitor results and overall
performance of customs against its operational and strategic objectives.
• IRM must be applied across all of customs processes adopting the appropriate tech-
nology to improve efficiency and promote transparency and integrity.

Source: Authors.

Knowledge of the Environment

Identifying and analyzing the main factors that may be facilitating and enabling
smuggling or customs fraud, as well as their link to the main economic operators,
are critical. Analyzing the cross-border context—the socioeconomic reality of the
country and differences with its neighboring countries, including the impact of
fiscal policy and its interactions with trade policies (tax and customs duty differenc-
es, exchange rate adjustments, and variations in the regional market)—could help
in understanding the roots of fraud and identifying different ways to address the
risks from a broader perspective. Likewise, the monitoring of economic operators,
particularly importers, in terms of their CIF3 value of imports, amount of revenue,
type of imported goods, and suppliers and customers against patterns of domestic
consumption and market prices can identify linkages to some key variables in fraud-
ulent activity. Additionally, institutional cooperation across government depart-
ments, ministries and agencies, and outside actors should be evaluated.

Preventive Focus
Customs needs to shift from a purely reactive or corrective vision toward a pre-
ventive focus that would contribute to reducing the probability of occurrence of
the main risks. Priority should be given to initiatives aimed at (1) decreasing the
use of discretion, (2) expanding electronic validation with third parties, (3)
increasing knowledge of operators’ performance, and (4) broadening digitalization
and customs automation and incorporating new technologies. Box 5.3 provides
an overview of some common initiatives.

3
Cost, insurance, and freight.

©International Monetary Fund. Not for Redistribution

140 Customs Matters: Strengthening Customs Administration in a Changing World

Box 5.3. Examples of Preventive Initiatives to Manage Risks

• Single window (SW) and authorized economic operator (AEO) are two examples of this
type of initiatives. Correct implementation of SW contributes to risk management as it
guarantees verification, authorization, and electronic issuing of certificates and per-
mits while at the same time ensuring and streamlining clearance processes. For its part,
the AEO program can be seen as a preventive initiative of risk anticipation, stemming
from the segmentation of the economic operators based on their compliance records
with the customs administration as well as certification of a series of processes adjust-
ed to security requirements. Along this line, a first step for many administrations might
be to develop a trusted trader program, which is less expensive and also helps mitigate
several risks. This allows for customs to optimize their resources and concentrate their
efforts on high-risk economic operators. This is discussed in detail in Chapter 4.
• Periodic review of policies and procedures to reduce discretionary practices and to
adjust to the operational realities of customs.
• Development and/or updating of e-forms and database index. Whenever possible, a
switch from paper documents to e-forms should ease information management
through better exploitation and analysis of data.
• Strengthening electronic validation of customs declarations by incorporating valida-
tion rules to generate greater certainty in declared information. For example, this can
ensure data consistency of customs declarations and compliance with requirements
by means of verification of third-party information sources.
• Use of an advanced e-signature. This allows validation of economic operators’ identity
by electronic means and may even be used to recognize operational delegation from
traders to customs brokers.
• Automation of economic operators’ registration and customs surety bond processes
by implementing electronic procedures that facilitate (1) communication with eco-
nomic operators without their presence at customs facilities, (2) step-based flow
management, (3) operational logs, and (4) e-payments and automated customs bond
management.
• Regularly reviewing and simplifying procedures to make it easier for traders to
comply.

Source: Authors.

Technology Adoption
A gradual adoption of new technologies should be “Building internal capacity
developed to (1) provide agility to processes, (2) to manage procurement
discourage discretionary practices, (3) strengthen
and technology is vital.”
operational traceability, (4) enable better data col-
lection and information management for decision making, (5) establish an effec-
tive third-party interconnectivity framework, (6) incorporate procedural audit-
ability, and (7) replace paper, seals, and handwritten signatures. Chapter 7 pro-
vides further guidance on several of these points.

Data Optimization
Customs modernization reforms should include promoting a culture where man-
agement is supported by data and information. This includes developing tools
that are cross-cutting in nature for collecting, processing, and exploiting data and

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 141

to support decision-making for each of the main processes. Likewise, it is neces-

sary to have a plan for improving information management that foresees (1) the
development of data dictionaries;4 (2) the definition of proprietors, guardians, and
users of the information; (3) the development of confidentiality policies, includ-
ing sanctions for noncompliance; (4) the implementation of access dashboards
and audit procedures; (5) the evaluation of the quality of the data that is generated
and received; and (6) the construction of applications to address the needs of data
collection, extraction, exploitation, and analysis of the business areas.
Although customs has lots of data, in many cases they are not yet used in a
practical way. It is common to find a lack of basic tools to summarize the profile
of the operators or monitor the status of cargo efficiently without the need to
request special extractions from the ICT unit. In addition, many continue to
target cargo manifests manually and outside the system and still do not have the
conditions to be able to categorize and evaluate the total population of importers,
apply systematically a methodology to assess and refine selectivity criteria, or
support PCA procedures. This topic of data optimization and tools to address it
are covered more fully at the end of this chapter.

Risk Management Committee (RMC)

It is strongly recommended that a customs administration have a risk manage-
ment committee (RMC) in place. It provides important oversight functions with
respect to identifying, assessing, and prioritizing risks and on determining, mon-
itoring, and evaluating risk mitigation strategies and activities under an IRM
approach. Though it is common to see that customs administrations have an
RMC, in practice such committees are not fully utilized and often are focused on
selectivity criteria. This approach is limited and does not assist in identifying and
addressing the main causes of the risks.
For instance, when analyzing examination results, customs should not only
focus on assessing the selectivity criteria; they also must assess whether further
training is necessary for officers, whether the sanctioning framework helps to
deter noncompliance, whether procedures force feedback into the system, wheth-
er oversight of procedures needs to be improved, and if the IT system has the
capabilities to optimize the use of data, as well as assess how customs clearance
and post-clearance audits (PCA) complement each other. All of these questions
help identify current weaknesses that prevent mitigating risks in a timely manner,
so they should be discussed extensively.
The RMC should be broad in scope and be constituted by a multidisciplinary
team. It should be institutionalized and structured on clear terms of reference to
ensure a disciplined and effective governance. This includes well-defined roles
and responsibilities of team members as well as meeting frequency and protocols.
Box 5.4 shows some suggested guidelines to consider when defining an RMC.

4
An inventory of names, definitions, meanings, and attributes about data elements, which also serves
as a metadata repository.

©International Monetary Fund. Not for Redistribution

142 Customs Matters: Strengthening Customs Administration in a Changing World

Box 5.4. RMC Governance

Key Governing Roles and Responsibilities

Head of customs. Directs, supports, and approves the development of policies for
strengthening core processes in line with an IRM approach. Provides oversight on the
implementation of these policies. Monitors progress through key performance indicators
and ensures that adequate and opportune remedial actions are implemented.
Directors and/or heads of divisions. Define risk management strategies and prioritize risk
mitigation measures. Supervise risk mitigation action plans for key customs processes.
Evaluate the impact of the activities on improving compliance. Define performance indica-
tors and regularly report to the head of customs on results achieved.
Technical subcommittees. Identify critical risks for each process and subprocess and rec-
ommend remedial actions. Working inclusively, promote and enable the adoption of a
culture of prevention, mitigation, and risk treatment. Report regularly to directors or heads
of divisions.
Customs offices, operational units, and staff. Carry out specific tasks defined to
strengthen processes under the IRM approach. Perform risk mitigation actions with dili-
gence and in a timely fashion. Provide operational input and evidence to feed the analysis
of current and emerging risks.
All parties. Support and promote the adoption of a risk management culture within the
customs administration and provide inputs and resources necessary to implement and
improve the IRM approach on a continuous basis.

Functions of the RMC

The RMC has the following functions:
• Identify and analyze border-related vulnerabilities within the core customs processes to
determine whether they are providing opportunities for smuggling, tax evasion, and
commercial customs fraud.
• Define the risk treatment measures or projects to address those vulnerabilities in keeping
with principles embedded in the IRM framework.
• Assess and approve the risk treatment activities that will be conducted before, during,
and after customs clearance.
• Monitor the implementation of the risk treatment activities to ensure they mitigate risks
as intended and adjust as required.
• Define the procedures that will be applied to keep the selectivity criteria relevant and
effective.
• Act as a permanent and institutionalized channel for cooperation and information
exchange among the different divisions and law enforcement agencies to mitigate risks
effectively.
• Design and implement an internal communication strategy to disseminate the IRM
framework and to articulate to officials how their activities contribute to meeting the
strategic objectives.
The committee should be supported by resources or specialized technical subcommittees
to consider, for example, new enabling technologies, management and optimization of
data usage, updating of selectivity criteria, collecting intelligence, conducting investiga-
tions, and improvement of the PCA function.

Source: Authors.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 143

Although it has been pointed out that risk management involves the entire
customs administration, in practice, it is necessary to have a unit responsible (a
“champion”) for articulating and monitoring the various efforts that shape the
risk management strategy. Within an organization, the enforcement unit fre-
quently takes the lead, although such lead may vary depending on the size of the
customs administration, its national complexity, and staff capacity. Among
the appropriate units to assume this role one can find the risk management unit,
the intelligence unit, or the investigations unit, all of them from headquarters. It
should be noted that the team responsible for assessing, prioritizing, and moni-
toring the treatment for identified risks as well as the general management of the
strategy must be different from the one in charge of its execution in the field. This
tactical approach becomes key to link the customs administration’s risk strategy
with its operation.

Institutional and Compliance Risks

For customs administrations, compliance risks may be understood as the greatest
threat to revenues while also hampering facilitation and reducing competitiveness
as well as potentially affecting national security or citizens’ protection. Institutional
risks, on the other hand, relate to obstacles or vulnerabilities that hinder the cus-
toms administration from attaining expected levels of effectiveness and organiza-
tional performance. Specifically, institutional risks refer to the governance and
management arrangements or weaknesses that hamper the operational function-
ing of the core business. These include, for example, inadequate resources, an
outdated customs code or regulations, lack of accountability, limited IT systems
that do not meet core business needs, corruption, or insufficient technical skills
and capacity among staff. Customs administrations should undertake an integrat-
ed identification and analysis of both types of risks, since they can influence
directly and indirectly overall efficiency and effectiveness.
In order to identify both types of risks as well as find their causes, the vulner-
ability levels of customs processes in relation to the institutional limitations of the
following structural elements must be reviewed: (1) legal framework, (2) informa-
tion, (3) processes, (4) IT systems, (5) infrastructure, and (6) human resources.
Box 5.5 describes each element in greater detail and provides examples on how to
begin its assessment.

©International Monetary Fund. Not for Redistribution

144 Customs Matters: Strengthening Customs Administration in a Changing World

Box 5.5. Structural Elements Related to Risk Identification

Definition Assessment
Legal framework. The customs Are there sufficient powers to enforce the law in
code should be complete, flexi- accordance with the mandates assigned to the cus-
ble, and related to the current toms administration? Does it enable preventive and
context. Also, it should be kept corrective powers throughout all control phases?
continually updated and aligned Does it include sanctions and penalties for irregular
with international good practic- conduct that are proportional, dissuasive, and effec-
es, with a comprehensive view tive through all control phases? Are there sufficient
encompassing all control phases. powers to require full and complete information to
In addition, it should provide the be provided and declared by electronic means?
authorities with legal powers Does customs have the authority to review, deter-
and coercive means to ensure mine and further control a given declaration or to
dissuasion from illegal or fraudu- examine books and records either in the customs
lent practices. office or at the taxpayer‘s or economic operator’s
premises? Is there clarity and complementarity
between powers and tasks for the units or depart-
ments involved?
Information. It should be stan- Is most of the available information handled
dardized, reliable, timely, and in electronic format, or does it require a
preferably received and dissemi- data capture process? Is it properly structured,
nated in electronic format, thus or does it require indexation? Do we have
enabling large-scale processing useful electronic information from third
and analysis. parties? Can it be extracted, exploited, and
analyzed on a large scale? Is data quality accept-
able, ensuring trustworthy results from the analysis
undertaken?
Processes. Processes should Are all processes uniform, understandable, and
be clear and predictable, predictable? Do the processes align with the legal
aligned with the legal frame- framework supported by IT systems? Is there
work and the institutional objec- permanent oversight and an ongoing action plan
tives, and supported by IT sys- for process maintenance and improvement? Is there
tems. They should be properly a permanent consultation system with the private
documented with clearly sector, and is it activated prior to the implementa-
defined functions and responsi- tion of new processes or improvements thereof?
bilities and cover all areas of the
organization.
IT systems. Far from being limit- Are there data analytic capabilities available
ed to the basic recording and fil- throughout all phases of control, enabling
ing of transactional functions, IT action and follow-up on the basis of information
systems should enable data col- analysis? Do the IT systems allow for the manage-
lection, handling and analysis to ment of an economic operator’s compliance
strengthen operational manage- history? Do they ensure full cargo traceability? Do
ment as well as to standardize they allow for massive cross-checks and analysis of
processes, reduce discretion, and internal and external data, as well as the validations
facilitate management decision- of electronic certificates and permits? Do they
making. guarantee data security and allow it to be audited
easily?

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 145

Infrastructure. Infrastructure Are there modern facilities, in optimum condition

should support the needs and and adequate to support trade volumes, so as to
objectives of the organization, enable proper physical inspections? Are there tech-
adding value through its align- nological tools such as nonintrusive equipment, tag
ment with the operational pro- readers, RFID transmitters, weigh stations, and so
cesses. It must help support the on linked to IT systems and aligned with critical
operational functioning and pro- processes? Is there enough capacity available to
vide security in the execution of ensure an efficient service to all traders in all chan-
customs actions and controls. nels? Are there strict access registry mechanisms in
This would include, for example, place for vehicles and visitors to ensure sterile
technological tools such as scan- facilities?
ners, electronic seals, and RFID
technology to monitor cargo,
while CCTV and physical inspec-
tion platforms are complemen-
tary options that enable the
supervision of customs officers.
Human resources. HR requires Are there clearly defined job profiles that are
well-defined job profiles and respected in the staffing process? Is there a strategy
training in accordance with for ensuring the transfer of technical knowledge?
functions and responsibilities. Are there mandatory induction courses? Are there
Staff stability should be ensured technical training courses for the different staff lev-
through a professional career els or different specializations? Are there staff with
management system with a the technical skills necessary to perform new or
complementary merit recogni- emerging functions, such as those related to data
tion program conducted management and analytics? Is there a code of con-
through the regular perfor- duct made known to all staff that incorporates
mance evaluation cycle. sanctions for violations? Is this code applied? Is
there a transparent career management system that
privileges internal promotion and fosters profes-
sional growth of the staff?
Source: Authors.

KEY COMPONENTS FOR SUSTAINED

OPERATIONAL FUNCTIONING
In order to have full operational functionality of the customs system, the fundamen-
tal aspects of the main processes must be included in the system and must serve their
intended purposes. An efficient operational functionality will contribute to reduc-
ing compliance risks and achieving a balance between control and facilitation.

The Starting Point

In general, all customs administrations are exposed to the same risks; however,
what changes is the level of exposure and the probability that these risks will
materialize. For many of the administrations the challenge rests with limitations
in identifying threats as well as in acknowledging internal vulnerabilities that

©International Monetary Fund. Not for Redistribution

146 Customs Matters: Strengthening Customs Administration in a Changing World

impede an effective and efficient control. Furthermore, many administrations

struggle with linking compliance risks to institutional risks in an integrated man-
ner while defining suitable treatments.
Also, it is important to distinguish between commercial fraud and smuggling.
The former is defined as any offense against statutory or regulatory provisions that
is under customs enforcement authority (WCO 2018).5 Overall, it is associated with
inconsistencies between declared quantities, customs value, misclassification, lack of
regulatory compliance, and documentary irregularities. Smuggling, on the other
hand, is the illegal entry of goods, without complying with formal procedures, via
concealment methods and/or unauthorized entry points, thus avoiding customs
control.6 The difference between the two is important as the legal powers and
strategies for each case may be different. It is common to see that customs adminis-
trations face legal and resource constraints to combat smuggling. For example,
sometimes they are not authorized or empowered to act in primary zones before the
cargo has a customs declaration or outside authorized points of entry, carry weap-
ons, seize, arrest, or use tracking devices. Chapter 6 addresses this topic in greater
detail. Box 5.6 describes some examples of compliance risks faced by customs.

Box 5.6. Examples of Compliance Risks

Valuation. Under- or overvaluation occurs when omitting (1) the real price on the invoice; (2)
the freight and/or insurance costs; (3) links between economic operators; (4) loading, unload-
ing and/or handling costs; (5) indirect payments; (6) commissions; (7) royalties and licensing
rights; and (8) other related amounts, as stipulated by the WTO Valuation Agreement. It is
important to mention that this type of risk may be identified through a values database
without overlooking international regulations on reference price setting.7 It is worth distin-
guishing whether one is faced with a genuine valuation issue or customs fraud through the
presentation of false documents, in which case it should be addressed differently.
Tariff classification. Misclassification may be attributed to various defrauding intentions,
among which can be found (1) customs duties and tax payments reduction and/or evasion;
(2) non-tariff regulations—special permits and/or certificates—omission; (3) customs con-
trols evasion; and (4) introduction of prohibited or restricted goods. Usually, risk confirma-
tion can only be carried out by physical inspection, or in some instances through access to
manuals and/or documents that detail the technical aspects. In other cases, obtaining a
sample for laboratory analysis is needed.
Origin. The purpose of an alteration of the goods’ origin is duties and/or tax evasion by
claiming preferential tariff treatment falsely. However, it can also be associated with an

5
Committed in order to: (1) evade, or attempt to evade, payment of duties/levies/taxes on movements
of commercial goods; (2) evade, or attempt to evade, any prohibition or restrictions applicable to
commercial goods; (3) receive, or attempt to receive, any repayments, subsidies or other disbursements
to which there is no proper entitlement; and/or, (4) obtain, or attempt to obtain, illicit commercial
advantage injurious to the principle and practice of legitimate business competition (WCO Glossary
of International Customs Terms).
6
This term may also cover certain violations of customs legislation relating to the possession and move-
ment of goods within the Customs territory. See WCO 2018 Glossary of International Customs Terms.
7
For further details, see WCO Guidelines on the development and use of a national database as a risk
assessment tool. http://www.wcoomd.org/en/topics/valuation/instruments-and-tools/guidelines.aspx.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 147

intent to avoid quotas or country restrictions, as well as with security when the true origin
has a link with a prior history of drug-trafficking, prohibited substances and/or goods with
which to wage war. Generally, risks of this type can only be confirmed if a physical goods
inspection is carried out and documentation is analyzed to assess the validity of the certif-
icates of origin presented and their compliance with formalities.
Non-tariff regulations. Non-tariff regulations or non-tariff measures imply the non-
submission or alteration of certification and/or authorization of certain goods that must
comply with various standards (measurement, technical, chemical and/or safety), as defined
by specialized agencies or authorizing departments or ministries. When no electronic valida-
tions with other entities are available (that is, absence of a single window), adequate threat
control demands a physical inspection in addition to documentary examination. Just as with
misclassification, inspection may require the presence of other government agencies.
Prohibited goods. These are goods that are barred from entering the country (it may be a
complete or partial ban). It is worth mentioning that “rip-off” modalities8 exist that are diffi-
cult to combat relying solely on the customs IT system’s information; therefore, it is funda-
mental to engage intelligence support from other national and international agencies. In
dealing with concealed goods, the use of nonintrusive equipment may be very useful as a
prior step to physical control/inspection, and said inspection must be conducted as soon as
the shipment reaches the national territory—to avoid the extraction of substances or goods
prior to the presentation of the customs declaration, while cargo waits in the primary zone.
Intellectual property. The risk to intellectual property must be understood not only from
the point of view of trademark, authors’ rights and patents violations, but also by the
implicit security and safety risks carried by counterfeit goods that do not comply with
national and international regulations (for example, safety, electrical, health, and so on).
Physical control is critical to ascertain possible threat materialization.

Actions
When analyzing and mitigating risks, some key actions include (1) identifying previous
customs declarations with identical and/or similar conditions, (2) identifying other import-
ers who trade in the same or similar goods or who have used the same supplier, (3) carrying
out a sectoral study or one by HS code, and (4) taking samples for further laboratory anal-
ysis and investigation.

Source: Authors.

Once the main risks have been described, it is necessary to analyze the leading
threats that can materialize during the customs processes. IRM promotes the best
use of available resources to mitigate the most significant (that is, probable and
consequential) risks and to facilitate better integration of structural elements.
Based on the practical experience gathered by IMF experts through their work
to support and strengthen their members’ customs capacity, Box 5.7 summarizes
the key vulnerabilities or weaknesses frequently observed within customs’ opera-
tional functioning, organized according to structural elements. The next section
presents some core customs good practices to respond to these weaknesses.

8
The rip-off modality is a concealment method whereby a legitimate shipment is manipulated to
smuggle prohibited substances. Normally the contraband is introduced into the container in bags that
are positioned close to the door. Typically, neither the shipper nor the consignee is aware that their
cargo is being selected to hide illicit goods.

©International Monetary Fund. Not for Redistribution

148 Customs Matters: Strengthening Customs Administration in a Changing World

Box 5.7. Major Common Weaknesses within

Operational Functioning
Legal Framework
• Legal voids related to the responsibilities, obligations, and grounds for suspension
and cancellation of privileges for economic operators
• Lack of adequate sanctions and penalties for the operational context to act as a deter-
rent for noncompliance
• Complex and bureaucratic administrative procedures for applying sanctions, penal-
ties, customs duties, and tax reassessments
• Lack of detailed rules, such as specifying mandatory data fields and penalties for
nonfulfillment or for requiring advanced information in electronic format
• Poor or limited regulations to administer and monitor free zones or special regimes,
including applying sanctions in cases of noncompliance
• Limited powers to act in primary zones before the cargo has a customs declaration or
outside authorized points of entry, conduct post-clearance audits, and exchange
information electronically with the tax administration and other agencies

Processes
• Fragmented view of processes with a failure to treat the entire control cycle, address-
ing risks that arise prior, during, and after release as they are integral to the cycle
• Absence of a general processes map, thus contributing to a lack of process transpar-
ency and traceability
• Operational procedure manuals that are either outdated or lacking, allowing for
unauthorized discretion
• Inconsistent application of standard operating procedures
• Excessive discretionary actions without proper oversight—for example, lack of adher-
ence to the principles of green or red channel selections without rationale or approval
• Strong reliance on paper documents, seals, and handwriting—wet—signatures
• High volume of manual processes requiring the physical presence of the trader or
economic operator in the customs office
• Rules for oversight of economic operators designed for validating conformity with
formal requirements (that is, is the right box ticked) rather than the verification of the
compliance level
• Absence of protocols enabling joint action with other agencies in the primary zone
• Manually kept records on entry and exit of goods in customs warehouses and poor or
nonexistent audit protocols
• Lack of enabling legislation and procedures allowing for the corroboration of inven-
tory in free zones and goods under special suspensive regimes
• High percentages of physical inspection of goods and outdated selectivity criteria
with limited effectiveness
• Lack of procedures for the ongoing evaluation and adjustment of selectivity criteria
• Minimum oversight on physical inspection results, a lack of feedback from customs
employees conducting the inspection, and limited sharing of exam results
• Lack of procedures for sampling goods that are difficult to classify
• Absence or poor policies and procedures for post-clearance audit

Information
• Lack of institutional capacity to use information as a key tool for process management
and risk handling
• Limited indicators, metrics, and related measures for monitoring and assessing vol-
ume, value, and revenue collection for the main transactions, goods, and economic
operators

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 149

• Inconsistent data in electronic form and limited coding for mandatory data fields
• Few sources of electronic information from other agencies and the private sector that
can be used for risk management
• Absence of key elements such as data dictionaries; owner, guardian and user of infor-
mation; confidentiality policies; audit procedures; data quality assessment—both for
internally generated data and those received from third parties
• Physical inspection results recorded in paper dossiers or other antiquated formats
that prevent their analysis or utilization by management or specialized risk manage-
ment units

IT Systems
• IT systems are predominantly oriented toward data recording rather than information
management
• Limited electronic cross-checks between customs declarations and other govern-
ment agencies
• Revenue collection IT subsystems— duty and tax payments, reassessments,
penalties—that lack full integration with the main customs IT transactional system
• Limited interoperability between the customs IT transactional system and those used
by traders and economic operators, hampering full cargo traceability
• Lack of data analytic tools to integrate cargo manifests into the bulk data analysis
• The transactional IT system is not designed to manage temporary admissions and
special regimes appropriately; bulk cargo in import and export transactions is poorly
managed
• Selectivity modules that lack flexibility and hinder management of risk criteria
• Lack or poor IT tools to support the management of post-clearance audits

Infrastructure
• Deficiencies in infrastructure, particularly at land border crossings
• Lack of facilities for sterile areas amenable to strict controls of entry and exit of indi-
viduals and vehicles as well as technology to support and improve the processes
• Nonexistent or very limited IT tools integrated into the points of entry infrastructure
allowing interactions with the customs IT system, helping to gather information and
strengthen processes

Human Resources
• Low staff morale due to the lack of a professional career management system privi-
leging meritocracy
• Staff appointed to positions requiring technical skills that they lack or the shortage of
staff with skills in emerging areas such as data analytics
• Lack of a permanent training program for all staff positions at all levels according to
the specific capacity development needs
• Limited or nonexistent induction training for newly recruited staff
• Outdated or absent codes of conduct, leaving management without the ability to
address poor performance of employees or corruption
• Noncompetitive salary scales that fail to guarantee reasonable income levels for the staff

Source: Authors.

©International Monetary Fund. Not for Redistribution

150 Customs Matters: Strengthening Customs Administration in a Changing World

Analysis of the Key Customs Processes

Having identified the starting point, a second level of analysis further explores good
practices within each customs process that can help to identify gaps and serve as
signposts for outlining a roadmap toward reforms and modernization. In this sense,
customs administrations may focus their efforts on four key processes or streams,
which have been identified to facilitate such modernization efforts through the
implementation of an IRM approach: (1) prior actions, including management of
economic operators and pre-arrival “cargo targeting”; (2) cargo management
through “end-to-end traceability”; (3) customs clearance; and (4) post-clearance
audit.

Prior Actions (Management of Economic Operators

and Pre-Arrival “Cargo Targeting”)
For the purposes of this chapter, the term “prior actions” refers to (1) those func-
tions that customs can perform to manage the registration and authorization pro-
cesses (when applicable) and to monitor economic operators and (2) cargo target-
ing, based on advance electronic information. These actions aim to prevent illicit
or noncompliant transactions through a screening process of economic operators.
The management of economic operators encompasses their initial registration,9
profile and registry updating, suspension, cancellation, and their reestablishment
upon correction; it is a vital component for enabling and validating customs trans-
actions. While it tends to be considered a purely administrative process, it has
direct impact on operational functioning. It should include risk analysis that
verifies the fulfillment of formal requirements established in the legal framework
and the analysis of the economic operators’ profiles, as well as permanent profile
monitoring. For example, it is necessary to have a robust regulatory framework
and effective procedures in place to ensure a certain level of compliance from, say,
customs brokers. However, often customs administrations do not monitor cus-
toms brokers’ compliance after they have been licensed. They lack the capacities
to monitor their behavior properly and deter noncompliance or the appropriate
sanctions to punish them. Sometimes the procedures are lengthy and ineffective,
leading some customs administrations to desist from trying to sanction them.
A solid program for the management of operators is a preventive measure in
IRM because it ensures that necessary preconditions are met for allowing them to
conduct their interactions with customs; an initial basic level of trust is built,
which serves as filter to mitigate risk.
For an effective management of economic operators, a modern customs
administration needs a reliable and robust IT platform to perform both its
administrative and operational functions. This must include identifying individ-
ual entities and preventing multiple registrations. The use of their tax

9
It is not intended to promote the establishment of an importers and exporters registry but a basic
tool to monitor compliance and make decisions based on the operators’ behavior.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 151

identification number (TIN) is highly useful, and ideally it should be the same
TIN used by the national tax administration, allowing for risk profiling. This is
the foundation of a risk-based environment for managing economic operators.
Likewise, the use of e-signatures is another important measure that helps validate
the identity of economic operators and reduce the risk of identity theft. Figure 5.3
shows the percentage of customs administrations that currently use the TIN and
accept e-signatures in their transactions, ordered by economic groups.

Figure 5.3. Use of TIN and E-signatures

1. TIN usage 2. E-signatures usage
90%
80%
Advanced economies 82% 80%
70%

"YES rate" responses

60%

Emerging markets 82% 50% 54%

40%
30%
Low-income countries 78% 20%
10% 13%
0% 20% 40% 60% 80% 0%
Advanced Emerging Low-income
"YES rate" responses economies markets countries

Source: International Survey on Customs Administration (ISOCA) co-managed by the IMF and the WCO,
2019–2020.

Box 5.8 provides a summary of good practices for managing economic opera-
tors to serve as a reference for identifying possible weaknesses or opportunities for
improvement.

Box 5.8. Good Practices for the Management of Economic Operators

• Establish formal registration requirements for economic operators.
• Adopt the tax identification number as a key identifier for all customs interactions and
transactions.
• Incorporate an e-signature to reduce the risk of identity theft.
• Develop and implement simple, straightforward, transparent parameters and proce-
dures to enable monitoring, suspension, reestablishment, and cancellation of eco-
nomic operators, along with fines and penalties to deter and sanction noncompliance
accordingly.
• Negotiate and implement protocols for cooperation and information exchange with
third parties, including domestic (particularly with the tax administration) and foreign
government agencies.
• Evaluate the consistency and coherence of the traders’ records within the tax admin-
istration (taxpayer size, compliance, and behavior) and their customs profile.
• Automate and record the flow of activities and exchanges between customs and
economic operators, as well as with other agencies involved. This engagement allows
customs to identify inconsistencies promptly and enables timely risk profile
adjustments.

Source: Authors.

©International Monetary Fund. Not for Redistribution

152 Customs Matters: Strengthening Customs Administration in a Changing World

On the other hand, the analysis of electronic information under pre-arrival con-
trol helps expedite the release of goods, while at the same time cargo targeting is
carried out. This analysis is usually performed before the shipment’s arrival by
reviewing cargo manifests. Risks identified in this control stage are, for the most part,
related to security issues and the protection of society. This action calls for a mitiga-
tion strategy, and it requires significant coordination and cooperation with different
stakeholders, including the port authorities and other law enforcement agencies. The
biggest challenges are not only related to information quality and sensitivity of data
but also to amendments to legislation needed to provide customs with the capacity
for swift responses and allow for the quick implementation of operational measures.
These actions require an effective cargo targeting IT system, generally nonexistent in
many customs administrations, as well as timely and reliable electronic data and a
team dedicated to this function; the team members must be properly trained and
subject to a strict integrity process. As Figure  5.4 shows, in some cases, customs
administrations still face considerable difficulties in receiving advance information
through electronic means and lag in automation, which further complicates the
challenge to address the risks and achieve full data traceability.

Figure 5.4. Mandatory Pre-arrival Electronic Data

Mandatory pre-arrival electronic data by means of transport and economic groups
Advanced economies Emerging markets Low-income countries

75%
Sea 57%
46%

75%
Air 61%
50%

0 10 20 30 40 50 60 70 80
"YES rate" responses (%)
Source: International Survey on Customs Administration (ISOCA) co-managed by the IMF and the WCO,
2019–2020.

Box 5.9 presents several good practices that can strengthen the pre-arrival
control— “cargo targeting”; these can be used as a reference to identify potential
weaknesses to be addressed.

Box 5.9. Good Practices for Pre-Arrival Control—Cargo Targeting

• Incorporate mandatory requirements for advance cargo manifest information in elec-
tronic format.
• Include adequate powers and action protocols for customs to enforce these
requirements.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 153

• Establish mandatory data fields and transmission time frames through well-documented
procedures and instructions, as well as applicable sanctions for noncompliance.
• Develop cooperation protocols between all intervening agencies, such as port opera-
tors, cargo handlers, and other government agencies.
• Put in place audit procedures and protocols to deter infringements and enhance com-
pliance.
• Implement an IT module to handle cargo manifests and air waybills, with data analysis
capabilities through massive data management tools. Ensure maximum coverage of
data fields and reliable pre-arrival validations through online tools, including access to
reference catalogs. Include “risk alerts” management, from targeting to examinations
and release, as well as results and feedback.
• Create a sustainable training program to refresh and update training topics such as risk
analysis techniques and targeting.10
• Customs administrations have progressively started to incorporate data analysis tools
such as big data, artificial intelligence, and network analysis into their targeting pro-
cesses. These tools should be added on top of to a solid risk management program, not
the other way around.

Source: Authors.

Cargo Management: Traceability End to End

Cargo traceability is a key component of a robust risk management strategy;
however, it is a significant weakness in many customs administrations. It consists
of identifying, monitoring, and tracking the movement of imports, exports, in-
transit, and transshipped cargo originating from, destined for, or touching the
customs administration’s territory. The objective of such traceability is to secure
trade integrity; therefore, it should consider (1) entry to and exit from land ports,
seaports, and airports; (2) loading, unloading, and
changing hands at any location; (3) entry to, stor- “Manifest information is
age in, and exit from customs warehouses; (4) an essential link in the
transfers and transit; and (5) monitoring invento- supply chain for cargo
ries of goods at warehouses, free zones, special traceability, targeting, and
regimes (such as exemptions and suspensive
customs clearance.”
regimes), and temporary admissions.
Cargo traceability cuts across all control phases, promotes adequate knowledge
of the status of the goods, and is useful in developing validations for detecting
inconsistencies when comparing cargo movements and successive declarations.
Achieving “end-to-end” traceability is not an easy task as it requires a coherent
transactional management IT system for all customs regimes; sometimes, the
challenge stems from technical or legal obstacles that hamper the interoperability
between customs and economic operators. Box 5.10 presents several good prac-
tices that can strengthen cargo traceability; these can serve as a reference to iden-
tify potential weaknesses to be addressed.

10
The WCO’s Risk Management Compendium (WCO 2012b) provides detailed guidelines on cargo
targeting.

©International Monetary Fund. Not for Redistribution

154 Customs Matters: Strengthening Customs Administration in a Changing World

Box 5.10. Good Practices for Effective Cargo Traceability

• Implement mandatory electronic transmission of cargo movement and status.
• Ensure interoperability between customs IT systems and those of all intervening eco-
nomic operators (private stakeholders) and government agencies enabling intelli-
gence and secure information exchange.
• Implement automated validations of key data elements of transport and cargo
documents—weight, units of measure, and so on—for entry and exit of goods.
• Require that all intervening economic operators use an inventory control system,
capable of providing customs with a minimum set of information according to pre-
defined functionalities and protocols.
• Supervise and control inventories regularly through risk analysis procedures.
• Obtain information on goods stored under special regimes or free zones—ingress,
transfers, local sales, and reexport of temporarily imported goods.
• Update the customs IT systems to enable full traceability of goods, both forward and
backward, from within any link of the supply chain, starting with key data elements,
including the carrier ID, manifest number, declaration number, goods storage num-
ber, container ID, warehouse ID, and so on.
• Implement regular surveillance programs on warehouses, free zones, and companies
that operate under special regimes as well as selected document and physical inspec-
tions to verify the shipments’ integrity and the reliability of the tracking mechanisms
and procedures.
• Develop a technology enhancement program, gradually adding tools such as RFID,
weigh stations, automated gates, vehicle tag readers, container ID readers, CCTV, scan-
ners, Internet of Things (IoT), and other nonintrusive equipment. All these tools should
be interconnected electronically and linked with the customs IT transactional system
and be accessible via electronic links to other agencies operating at the border or inland
as the traceability data are also valuable for national logistics and infrastructure planning.

Source: Authors.

Also, end-to-end traceability can be reinforced by linking other transactional doc-

uments to the shipment’s physical traceability. Some customs administrations, such as
those from Brazil and Mexico, are leveraging their domestic e-invoice programs by
adding a foreign trade component by requiring the conversion of the foreign export-
er’s commercial invoice information into manageable data and linking such data to
the importer’s domestic supply chain, including the importer’s VAT chain.
On the other hand, for exports a customs administration may add a few data
fields to its domestic e-invoice to require the foreign importer’s taxpayer identifi-
cation number and other relevant data elements, which can be validated with that
importer’s customs administration. The purpose of such validations, which can be
conducted in real time, should be to impede any false or simulated export to
occur as they can be used to launder money, claim a VAT refund for which the
exporter is not entitled, or simulate the reexport of goods under a special regime
to introduce such goods into the domestic market avoiding tariffs, taxes, and non-
tariff regulations. The other data contained in an e-invoice (that is, goods, value,
quantity, unit of measure) can be shared and verified as well, thus adding value to
the initiative by enhancing the trade and customs compliance and enforcement
capabilities of the participating customs administrations.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 155

Customs Clearance
Clearance has traditionally been the core role of customs. It consists of verifying
compliance with obligations to which the goods are subject during the importa-
tion or exportation process through the following series of steps: submitting the
declaration, paying the corresponding taxes and duties, assigning a channel,
examination, and release of goods.
To clear goods, customs evaluates the information found in customs declara-
tions and supporting documentation in order to identify threats primarily associ-
ated with tariff classification, measurement units, origin, supplier, valuation,
other non-tariff regulations, and tax and duty payment. The risks faced here are
primarily revenue related. Customs also evaluates other factors such as intelligence
received, the routing of the shipment, the history of the traders, non-tariff regu-
lations, and so on to make a clearance decision that may be related to revenue,
health and safety, or other priorities.
In the case of exports, it is fundamental to ensure the effective exit of goods
from the country to avoid inappropriate use of benefits linked to deferments or
export tax-based credits and for closing temporary admissions or suspensive
regimes. Also, to detect simulated exports or manipulated transactions that may
be used to launder money or shift profits amongst related parties.
Overall, modernization efforts in customs clearance focus on reducing con-
trols and release time, usually achieved through lowering selectivity rates.
However, this will not have the desired outcome if other aforementioned weak-
nesses within operational functioning as well as institutional risks are not
addressed in an integrated manner. In addition, it is necessary to ensure that the
selectivity system is evolving to contribute to the expected results. Table 5.1 illus-
trates how customs may evaluate the maturity levels of the selectivity process.

TABLE 5.1.

Maturity Levels of Selectivity during Clearance

Level 1 Level 2 Level 3 Level 4
All rules and pro- Some rules and profiles Only rules and profiles All rules are implement-
files are managed are managed by the IT associated with data ed by risk analysts—
by the IT unit. unit. models require the inter- intervention of IT staff is
vention of IT staff. not required.
A few data fields of Most, but not all, data All data fields of the man- Historical data from cus-
the manifest and fields of the manifest ifest and declaration are toms declarations and
only some basic and declaration are available. manifests are incorpo-
data fields of the available. rated as additional vari-
customs declara- ables into the profiles.
tion are available.
A rule or profile is A rule or profile is creat- Rules and profiles use Rules and profiles are
created to select ed based on one condi- multi-variable combina- identified through artifi-
just one tion or data field (eco- tions of simple expres- cial intelligence and
declaration. nomic operator, goods, sions to select all declara- machine learning
country origin, and so tions with these multi techniques.
on) to select all declara- conditions.
tions with these
parameters.
(continued)

©International Monetary Fund. Not for Redistribution

156 Customs Matters: Strengthening Customs Administration in a Changing World

TABLE 5.1. Continued

The number of hits The effectiveness11 of a Rules and profiles assess- Rules and profiles are
derived from a rule rule or profile is ment can be calculated automatically assessed
or profile is unknown. manually, and ineffective through the system and
unknown. ones are sporadically ineffective ones are reg-
removed. ularly removed.
Irregularities can- Irregularities are linked Irregularities are linked to Irregularities are linked
not be linked to a to a specific declaration. a specific declaration and to a specific declaration;
specific declaration. its offense amount is cal- its offense amount can
culated automatically by be calculated automati-
the system. cally and records—data
before and after
detection—are available.
Source: Authors.

To bolster the selectivity module, it is necessary that the system meets specific
requirements presented in Box 5.11 at a minimum.

Box 5.11. Good Practices for Strengthening the IT Selectivity Module

Initial steps should include the following:
• Integration of variables originating in data fields in cargo manifests, historical records
of transactions and economic operators, and cargo movements
• Incorporation of validations of text fields to identify similarities or approximations to
key terms
• Building multivariate risk profiles12
• Measuring risk levels for each transaction through different empirical models based on
current and historical information
• Requirement for feedback through pre-established catalogs
• Recording all actions executed in connection with rules module management
• Modelling and calibration of rules autonomously or by risk analysts directly into the
selectivity module, for example, without the direct participation of the IT area
• Development of a valuation database on sensitive goods, in support of the definition of
specific selectivity criteria

Once profiles have been built and are in use, it is recommended that the following prioritization
model be used:
• Normative rules—mandatory controls defined by legislation
• Exemption criteria—for low-risk importers and/or AEO
• Deterministic rules—certain risk profiles, conditions and/or patterns are verified from
customs offenses records and outliers through data analysis techniques
• Random rules—based on some criteria or for the total of the declaration from which a
random selection is applied

A basic condition for the effectiveness of a set of profiles is to have in place a rules-updating
process. Any risk profile remains in force if its effectiveness meets or exceeds the selected criteria:

11
Number of hits or customs controls with tax payments amount and/or customs offenses confirmed.
12
Multivariate profiles should consider (1) commands for building the profile through logical expres-
sions (“and,” “or,” ˃, ˂, ≠, =, “in,” “contains,” and so on); (2) lists or catalogs for reference searching;
(3) a profile description; (4) validity (in time) of the programmable profile; (5) a module for impact
testing; and (6) a rules management registry.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 157

• Average effectiveness of random rules

• Average effectiveness of normative rules
• Average effectiveness of deterministic risk rules
• Average effectiveness of the selectivity channel for which the rules were created
• Effectiveness levels as defined by the organization
• Effectiveness levels reached in the previous period (semester, year, or other, including
the same month in the previous year)

Source: Authors.

Additionally, Box 5.12 presents several good practices that can strengthen
cargo release; these can be used as a reference to identify potential weaknesses to
be addressed.

Box 5.12. Good Practices for Effective Control during Cargo Release
• Ensure the legal framework includes rules and procedures aligned with the current
environment and needs, considering the intensive usage of new technologies. The
legal framework should also include powers enabling customs to request and analyze
documents and information from traders and economic operators in electronic format.
Adequate and proportional sanctions aimed at correcting behavior should be an inte-
gral element of the framework.
• Fully automate all steps and functions in the customs process related to declaration
filing, payments, selectivity channel assignments, results feedback, and goods release.
• Use bar or QR codes in the declaration, as well as RFID to allow tracking of cargo status.
• Implement procedures to assess, eliminate, refine, and incorporate selectivity criteria/
rules periodically.
• Incorporate a random selection mechanism that allows for the application of different
random selection rates according to risk factors and existing and potential threats, and
compare the effectiveness of the selectivity criteria/rules versus the results derived
from the random selection. Also, assign random inspections according to the availabil-
ity of personnel. Discretionary selection should be avoided, but if it occurs there should
be clear procedures in place and both the procedures and results must be monitored
periodically.
• Promote a proactive role of the customs laboratory in developing strategies for taking
samples of sensitive and/or difficult to classify goods.13 Technical rulings should be used
as inputs for the definition of selectivity criteria and/or for a PCA program.
• Strictly supervise the way inspections are executed and reported, as well as the quality
of the information entered as feedback.
• Ensure adequate training for all staff and create specialized groups for dealing with key
harmonized system (HS) tariff chapters linked to sensitive products whenever possible.
• Develop a dashboard with at least the following indicators: (1) time release; (2) evolution
of number of declarations, CIF values, and revenue collection; (3) selectivity channel
percentage distribution; and (4) effectiveness of all control measures. These indicators
should encompass all transactions, main goods, and most relevant economic operators.

Source: Authors.

13
Sensitive goods are those more susceptible to be misclassified. This tends to be more likely in tariff
codes that are (1) subject to VAT and/or duty exemptions; (2) show greater value adjustments; and/or
(3) selected by experts and supported by the laboratory—for example, chemical products, electronics,
medicines, steel, fuels, textiles, clothing, and footwear.

©International Monetary Fund. Not for Redistribution

158 Customs Matters: Strengthening Customs Administration in a Changing World

Risk Management also Matters in Exports

Traditionally, customs administrations have paid less attention to controlling
their countries’ exports. In some cases, customs administrations deem exports as
low-risk transactions; therefore, they implement weaker controls. Exports may
contribute greatly to a country’s economic growth and prosperity and customs
must facilitate such transactions, but that doesn’t mean that customs should look
the other way and ignore the numerous risks involved in them.
Risks associated to exports are generally linked to (1) close out a temporary
import, including those under special regimes, to introduce the goods into the
domestic market without paying applicable duties and taxes; (2) claim an unsup-
ported VAT or other tax refund; (3) shift profits among related parties; and (4)
reduce royalty payments, particularly in the mining industry. Other risks include
exports of illegal drugs, weapons, munitions, counterfeit goods, and national art
and cultural treasures.
Exports and imports are also utilized to launder money derived from illicit activ-
ities and even to finance terrorist organizations. Trade dynamics, the diversity of
tradable goods and services, and the involvement of multiple parties, pose significant
risks to governments and society, which customs administrations can help mitigate
(FATF – Egmont Group 2020a). The IMF and the United Nations Office on Drugs
and Crime (UNODC) have estimated that the amount of money laundered globally
is between 2 and 5 percent of the world’s total GDP per year.
On the other hand, a significant number of countries are signatories to differ-
ent international conventions aimed to enhance export controls and impede the
proliferation of nuclear materials and weapons of mass destruction, chemical
precursors trafficking, and unlicensed trade in dual-use goods.
Some of the illicit transactions are conducted through the simulation of
exports (that is, empty containers declared as an export of certain goods to further
“legitimize” the transaction in accounting records) or the manipulation of the
good’s classification, value, and quantity. Other transactions are simply conducted
by concealing prohibited or restricted goods in apparently normal shipments.
Customs must invest financial, technological, and human resources to enhance
their export controls, and the best way to do so without disrupting the flow of
legitimate exports is by enhancing their risk management capabilities.
In general, the same principles and elements applied to imports can be applied
to exports (that is, developing and assessing the risk profile of exporters and other
operators involved in the export transactions and cross-checking data from differ-
ent sources to identify discrepancies or unusual behavior). Also, it is necessary to
have in place a selectivity system with the same components utilized for risk
management in imports as well as to gradually introduce technological tools to
record, analyze, and verify export transactions, including technologies applied to
identify and examine shipments at the ports of exit (that is, RFID to identify the
shipment, OCR to identify the truck and the box/container, nonintrusive equip-
ment to examine the content/goods). Sampling and expert examination of certain

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 159

goods (that is, minerals) is essential to ensure compliance as the exportation of

such goods is generally subject to special requirements and taxation. In many
countries, such goods account for a significant portion of their exports; therefore,
having a well-equipped laboratory and experienced examiners is key.
Furthermore, PCA results and information provided by the investigation and
intelligence units, including information gathered through cooperation with the
customs administrations of the importing countries, are key to identify the scope
of the fraudulent transactions and determine appropriate actions to address each
case and sanction violations accordingly.
Additionally, the cooperation between customs and the Financial Intelligence
Unit (FIU) is a fundamental element to facilitate the identification, disruption,
and dismantling of criminal organizations that use international trade as their
channel to conduct their illegal activities. In this regard, the WCO and the
Egmont Group developed a Customs Financial Intelligence Cooperation
Handbook (WCO and Egmont Group 2020), where they highlight the most
common challenges in money laundering, including trade-based money launder-
ing. The handbook includes specific recommendations for both customs admin-
istrations and FIUs regarding the following topics: (1) smuggling and concealment
of currency, currency equivalents, gems, and precious metals; (2) trade-based
money laundering; and (3) money or value transfer systems and alternative remit-
tance systems.
At the same time, customs administrations must work closely with tax admin-
istrations to ensure that, among others, (1) VAT refunds are issued accordingly
only to those exporters that have actually exported their declared shipments, (2)
the export value declared at customs coincides with the declared value of sales for
income tax purposes, (3) there is consistency in the values of the exporter’s activ-
ities (costs, inputs, sales, exports), and (4) profit shifting among related parties is
detected.
Finally, regarding exports from extractive industries (EI), customs’ role is usually
sidelined because such exports do not lead to direct customs revenues as most EI
exports are usually exempted from VAT and customs duties. Likewise, the respon-
sibility for determining the minerals and hydrocarbon molecular composition and
their quantities, quality, and prices typically resides with the respective sector min-
istries. However, for effective EI export controls, customs needs to play its role as
with any other goods, including establishing and enforcing controls to validate
mineral and hydrocarbon classification, quantities, quality, and price and collecting
and providing accurate data on physical flows to tax and other government agen-
cies to facilitate the correct assessment of EI revenues and statistical purposes.

Post-Clearance Audit (PCA)

A modern customs administration must foresee a considerable investment in
developing PCA as a means of promoting compliance and strengthening risk
management. This is particularly relevant in countries where customs revenue

©International Monetary Fund. Not for Redistribution

160 Customs Matters: Strengthening Customs Administration in a Changing World

represents a significant percentage of total revenue collections. Despite several

internationally available tools that promote PCA development as a means for
enhancing voluntary compliance, streamlining goods clearance, and reducing
time release, many customs administrations have yet to achieve full implementa-
tion. PCA is also referenced in Chapters 2, 4, and 6.
PCA is the most exhaustive and complete review of traders’ customs transac-
tions. Reviews are conducted in the post-release customs environment, thus con-
tributing to voluntary compliance and the facilitation of trade. The overall objec-
tive of PCA is to ensure that customs declarations have been completed in com-
pliance with customs legal obligations, as well as requirements under any other
law or regulation applicable to imports or exports, via examination of a trader’s
systems, accounting and other business records, and premises (WCO 2012).
The  main strength of PCA is that it allows customs administrations to address
complex issues that cannot—and should not—be examined in depth during the
clearance of goods, such as valuation or special customs regimes, while also serving
as an important deterrent tool and a means to educate traders and promote com-
pliance. For example, PCA can do the following:
• Identify inconsistencies in quantities and values of transactions by reviewing
books, records, and physical inventories as well as cross-checking informa-
tion with the tax administration and third-party stakeholders (public and
private enterprises).
• Request contracts, invoices, and other documents, including transport and
storage documents, that may affect the customs value declared.
• Address proprietorships, related parties, and transfer pricing issues, and
detect, in conjunction with tax administrations, fake export schemes of
goods zero-rated for VAT purposes and other import or export schemes to
avoid tax regulations.
• Verify compliance with exemption and waiver programs, obligations, or
special regimes, to detect the abuse of the benefits granted under such
programs.
• Review previous years when detecting that a good has been imported
using an incorrect tariff classification or certificate of origin, thereby
avoiding a higher customs duty or tax, or compliance with a non-tariff
regulation.
Conducting these procedures within the operator’s premises allows customs
officers to access the complete information related to the transactions and supply
chain; raises awareness with customs requirements; and pushes traders to change
their behavior and comply correctly, increasing revenue collection. Some customs
administrations periodically publish aggregate results of their PCA actions, thus
increasing risk perception amongst other operators.
Frequently, the review process is limited to the selection of transactions or
declarations after the goods have been released. While these transactional reviews
may prove useful to redress some specific instances of noncompliance, they do not

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 161

necessarily stem from a comprehensive analysis that identifies the main risks,
economic sectors, goods, operators, and their interactions and linkages. Theses
reviews are insufficient to improve compliance levels of economic operators and
should evolve into comprehensive audits.
In general, there are five obstacles that may prevent customs administrations
from implementing an effective PCA: (1) lack of an up-to-date legal framework,
including the necessary powers to enforce the law in the post-release environment;
(2) absence of audit standard operating procedures (SOPs); (3) no rigorous oversight
over the consistent application of these SOPs; (4) shortage of staff with the appro-
priate technical skills and training; and (5) constraints to collect timely and reliable
data that can be analyzed by electronic means—particularly from third parties.
PCA should be based on a comprehensive
analysis of economic operators’ profiles and com- “The economic operator’s
pliance records with the aim of identifying and compliance records within
carrying out comprehensive control actions that tax and customs may
are corrective in nature and contribute to
showcase similar behavior;
improved voluntary compliance. Procedures are
broadly similar to those used in tax administra- analyzing both compre-
tions, and ensuring their correct implementation hensively leads to a more
generally requires a considerable long- term complete understanding of
investment in technical training as well as the compliance level.”
strengthening regulations to allow for adequate
audit powers and consistent policy application.
An effective PCA function requires a dedicated critical mass of resources to
ensure a sustainable presence to verify compliance levels and to ensure that a rea-
sonable deterrent exists. It needs a resource base commensurate to the size of the
importing population to facilitate reasonable audit coverage. It also requires well-
developed internal procedures to deliver a consistent, complete, accurate, and
timely audit program. This helps to protect revenue and generates a level playing
field for all traders while supporting a framework that enhances facilitation.
The audit process should begin with the development of an annual plan. Such
a plan should consider the identification and analysis of the main compliance
risks. Subsequently, the number of cases that will compose the actual plan and its
prioritization must be determined on the basis of (1) studies and analyses on
sensitive sectors, customs regimes or goods, and cross-verification of data; (2)
segmentation of the operators by size and risk level14—including compliance
records; (3) complexity of the cases to be executed; and (4) the number of audi-
tors available and their technical capabilities.
Likewise, key elements on which the annual audit plan heavily relies are the
diversity, quality, and timeliness of third-party information, particularly from the tax

14
Having a methodology for determining a global risk indicator is very useful, and further details are
provided in the data usage section of this chapter and its appendixes.

©International Monetary Fund. Not for Redistribution

162 Customs Matters: Strengthening Customs Administration in a Changing World

administration and other customs administrations. Figure  5.5, taken from

the ISOCA survey and classified by economic groups, presents some examples of key
information that tax administrations usually share with customs for PCA purposes
as part of their tax-customs cooperation. It also shows, for each item, the proportion
of customs administrations that responded that they receive it on a regular basis.

Figure 5.5. Electronic Data from Tax Administrations by Economic Groups

Advanced economies Emerging markets Low-income countries

Risk level 45%

32%
26%
55%
Total VAT paid 61%
43%
Foreign sales 55%
43%
43%
45%
Total income 54%
39%
64%
Representatives' 64%
names 57%
Economic activity 82%
57% 71%
Taxpayer address 82%
79%
78%
82%
Taxpayer number 82%
78%

10% 20% 30% 40% 50% 60% 70% 80%

"YES rate" responses

Source: IMF and WCO (2019–2020)’s International Survey on Customs Administration (ISOCA).

PCA policies should be flexible enough to introduce innovations in all steps of

the process in order to adapt to the evolving environment and to improve its results.
This continuous improvement process leverages the annual environmental scans
and the audit results. The areas in charge of risk analysis, investigation, and intelli-
gence functions, as well as the legal department, must be involved in this process.
Improving operational performance also requires the identification of key
indicators to evaluate (1) the execution time (time standards); (2) the risk man-
agement process effectiveness; (3) the audit coverage level; (4) the audit results
achieved; (5) the amount of taxes actually collected over the total taxes owed
determined through PCA cases; and (6) the changes in the compliance levels15 of
the operators linked to the risk hypothesis, within a customs regime, sensitive
sectors, commodities, HS codes, or origin of goods on which the audits were
focused. These indicators represent the basis for decision-making to improve the
selection and execution of future audits. Attention to these points leads to an
effective PCA program, allowing customs administrations to reasonably feel con-
fident about reducing their selectivity percentages at the points of entry/exit, and,
in doing so, improving time release and trade facilitation.
Box 5.13 presents good practices that can strengthen PCA and can serve as a
reference to identify potential weaknesses to be addressed.

15
This indicator requires a measurement program, whereas a statistically valid sample of importers
would be randomly selected for audit and comparative purposes.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 163

Box 5.13. Good Practices for Effective Post-Clearance Audit

Audit planning should be supported by sectoral studies, studies on HS codes, customs
regimes, and operator analysis, encompassing the following:
• An assessment of traders’ compliance records from customs and other government
agencies
• The incorporation of information from related third parties
• A cross-checking verification between customs declarations and domestic tax returns
(consistency assessment)
Sectoral studies should include the following:
• Full understanding of business activity through supply and demand analysis
• The supply chain
• Price structure and evolution analysis
• Price comparison analysis with others importing identical or very similar goods (for
reference purposes)
The outcome of these studies should contribute to the following:
• A broad perspective on the behavior of different sectors of importers
• Greater specialization to identify atypical risk patterns
• The identification of those operators who represent higher risks—looking at their
relative importance or materiality based on their volume of transactions and/or CIF
value
The customs IT system for audit management, follow-up, and assessment should meet, at
the minimum, the following criteria:
• Electronic inspection record of audit, and names of involved staff
• Dates for notification and/or initiation of the audit
• Record of all reports generated as a consequence of each intervention
• Sequence and status of the stages of the audit process
• The outcome of every act linked to the transaction so as to build future rules
• Agreements reached and payments
• Status of any administrative recourses and appeals
• Details on any adjudication of goods
• Performance indicators
All this should be supported by the following:
• An audit team trained in valuation, tariff classification, rules of origin, accounting, and
domestic taxes
• Legal powers for (1) conducting desk and/or field audits; (2) administrating sanctions
in line with current trade transactions and designed to promote compliance; (3) reas-
sessing the value for duty; (4) determining adjustments required to duties, VAT, and
excises related to customs transactions; and (5) enforcing a self-assessment and cor-
rection regime
• Usable information from different agencies and third parties, particularly tax admin-
istrations shared systematically and under a legally based mechanism
• Policies and procedures manuals for the PCA cycle—planning, selection of cases,
preparatory actions, execution, evaluation, and follow-up—fully documented and
regularly updated
• Protocols for procedures oversight, quality control, and results evaluation

Source: Authors.

While most of the previous guidance relates to control of imports for domestic
consumption, PCA can be adapted to all customs regimes. An example, due to its
materiality and complexity in many countries, is the management of duty/tax
exemptions on imports. Customs administrations often face difficulties in

©International Monetary Fund. Not for Redistribution

164 Customs Matters: Strengthening Customs Administration in a Changing World

administering and monitoring exemptions, under which the revenue foregone

can represent half of the total revenue collected by customs. However, clearly
defined procedures under such programs simplify compliance, strengthening the
audit process and ensuring its consistent application.
As there is a high risk of significant revenue loss from negligence or deliberate
fraud, all exemptions require close attention. The main weaknesses to properly
exercise this function are (1) limited knowledge of the beneficiaries of these
regimes, (2) lack of awareness of the volume of exemptions granted, (3)  open-
ended exemptions privileges, (4) absence of monitoring or verification of the
bona fides of beneficiaries, and (5) limited automated processes.
Customs should also have legal powers to ensure that benefits are not abused.
Therefore, customs must have special units or at least minimum staff assigned
formally to the compliance work focused on the exemption and waiver regimes.
Detailed reports should be produced where statistics on beneficiaries and trends
of imported quantities by HS code, origin, value of goods, and revenue forgone
are noted. Box 5.14 lists a combination of good practices that need to be imple-
mented at different stages to mitigate the risk of revenue leakage due to the abuse
of exemption programs.

Box 5.14. Good Practices for Monitoring Exemptions

• Review and strengthen procedures for the granting of concessions in coordination
with relevant ministries—including impact assessments.
• Certify and grant authorizations by electronic means as well as identify goods using
HS codes.
• Maintain detailed electronic records of projects, inventories, and beneficiaries and
validate declarations.
• Establish the minimum requirements and standards that an electronic inventory must
contain to enable monitoring and auditing.
• Devote adequate resources to monitoring and follow-up.
• Develop an exemption compliance program and provide training to officers.
• Have a modern and updated legal framework and a penalty policy in place.
• Develop close cooperation and information exchange mechanisms (such as MOUs)
with government agencies, particularly with the tax administration, Ministries of
Tourism, Economy or Trade, Health, and Agriculture, and any other agency involved in
regulating foreign trade.
• Have up-to-date knowledge of businesses and sectors benefiting from exemptions.
• Scrutinize import documentation and exemption certificates—and cross-check to
verify authenticity, entitlement, and expiration.
• Conduct periodic unannounced verifications at the enterprise premises receiving the
exemptions to physically check whether the end-use conditions are being met.
• Take robust enforcement action when fraud or misuse is detected.
• Senior management takes interest in the compliance work area, request and review
regular detailed reports.

Source: Authors.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 165

USING DATA TO DEVELOP TREATMENT STRATEGIES

As discussed throughout this chapter, there are several risks that customs admin-
istrations have to face across core processes; thus suitable treatments become
crucial and necessary. They should be implemented at different times and consist
of a mix of actions that should consider (1) monitoring operator compliance, (2)
providing training and information on customs requirements and procedures to
help economic operators to comply voluntarily, (3) encouraging operators to
comply through enforcement actions, and (4) strengthening judicial and/or crim-
inal processes to deter further breaches in the future.
The assignment of these treatments defines and determines a control strategy.
This means that more parameters will be available to guide control decisions. It
should start by analyzing the entire set of economic operators followed by an
understanding of their distribution across the trader spectrum—size, trade of
sensitive goods, compliance history, and so on—and the linkages between size
and risk level. For example, control during clearance can focus primarily on new
and occasional economic operators, the informal or underground sectors, and/or
infrequent operators at risk of disappearing. Formal economic operators, whose
imports might require a more in-depth study, ought to be treated at a later stage
through a post-clearance audit. The latter offers better conditions, enables the
allocation of more time, and can be extended to a representative number of dec-
larations. However, if targeting produces a security concern, the control actions
must be executed immediately and in accordance with established protocols.
The strategy must consider the available resources and the strengths of the
organization to execute control and preventive actions during the different stages
in which it interacts with an operator. Some customs administrations tend to
concentrate their control decisions on physical and documentary controls during
the release of goods, which reflects the lack of a comprehensive strategy. The
absence of a comprehensive treatment strategy aligned by risk type and based on
the segmentation of operators by size and risk level, leads to a weakening in the
effectiveness of controls and preventive measures, which in turns ends up ham-
pering customs facilitation.
In order to identify the proper treatment strategy, customs administrations
need to collect and process data. This becomes a relevant input to get information
and enables the organization to identify, analyze, assess, and treat risks efficiently.
All this depends on the available capacity within the administration as well as the
identification of those weaknesses present in customs core processes.

DATA USAGE OPTIMIZATION

A proper and extensive use of information should be considered a critical element
to support and reinforce both strategic and tactical decision-making in order to
achieve an effective management of customs processes. The optimization of data
usage enables customs administrations to achieve a sound understanding of their

©International Monetary Fund. Not for Redistribution

166 Customs Matters: Strengthening Customs Administration in a Changing World

trading environment in a cost-efficient manner by “Customs IT systems must

making an appropriate allocation of resources. In evolve from simply
turn, it is also a powerful element to bolster legit- recording transactions to
imate trade by identifying compliant operators
serving as platforms to
and customs transactions. Accordingly, this sec-
tion provides a discussion of data optimization as guide information-based
fundamental input to support risk management. processes and decision
The first challenge to customs administration making.”
is to manage and organize available high volumes
of data in a rational and meaningful manner in order to convert it into useful
information. In this regard, the most relevant bottlenecks related to data need to
be avoided. Box 5.15 shows some of the most common examples.

Box 5.15. Customs Data Bottlenecks

• Incomplete data. Sometimes the regulations do not require the transmission of data.
• Absence of data. The lack of electronic information exchange agreements between
government agencies and key stakeholders prevents access to relevant data.
• Poor quality of data. The validation of certain data cannot be done automatically
enabling misspelled data fields.
• Data not parametrical or customizable. The information is in hard copy and/or is a free
text, which requires manual interpretation by a customs official.
• Untimely data. The data does not allow targeting risky transactions in a timely
manner.

Source: Authors.

After addressing data bottlenecks, the next challenge is to perform a data

cleansing process. For instance, “container number” and “supplier” are data fields
that are not usually confirmed and/or validated, potentially containing multiple
versions of spelling in customs declarations. These are by no means the only ele-
ments that could derive multiple “versions” of the same concept or person, and
we must therefore consider, for example, (1) keying errors, (2) homonyms, (3)
synonyms, (4) translation errors, (5) font variations, (6) incomplete words, and
(7) abbreviations, among others.
The cleansing process aims to validate and reconcile the data, which can be
further found in different systems or information sources. In addition, some
customs administrations have developed their own data code that makes it possi-
ble to avoid the previously mentioned challenges and reinforces the exchange of
information. The data model promoted by the WCO16 is a good example of a

16
The WCO’s data model is a set of combined data requirements. It is consistent with other inter-
national standards such as the United Nations Trade Data Elements Directory (UNTDED) and
includes not only data sets for different customs procedures but also information needed by other
cross-border regulatory agencies for goods release at borders. It helps improve data quality by using
standard international codes and allows to build better quality risk profiles. For further information
see http://www.wcoomd.org/DataModel.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 167

useful tool to prevent and address data issues. The way in which data are com-
bined and interconnected may pose new obstacles, as Box 5.16 shows, enabling
information weaknesses.

Box 5.16. Customs Information Weaknesses

• Disconnected information. The data are scattered across several satellite systems,
and/or there are no data analysis tools that can link them.
• Information of general scope. The data are aggregated or consolidated for a period of
time and/or by operator, making it impossible to perform validations at the opera-
tions level or to analyze each transaction.
• Information is compartmentalized or isolated. The access is limited or restricted, and/
or units do not share information.
• Information is not generated due to low analytical capabilities. If customs officers are
not trained in analysis techniques and/or there is an absence of analytical tools, it is
not possible to analyze the goods, the operation, and/or the records of the operators
involved.
• External information cannot be linked with internal data. Customs data are not able
to be cross-referenced with national and international alerts and/or intelligence
information.

Source: Authors.

At this stage, data linkage is key and becomes a new goal for customs admin-
istrations. The data may be organized and structured according to a specific good,
operator, and/or customs regime. For purposes of this section, these last three
terms are defined as “analysis variables.” They define both the type and character-
istics of each customs transaction and the possible root cause and/or triggers of
identified risks. The nature of goods, the profile of operators, and/or the oppor-
tunities offered by a specific regime encompass the full range of common threats
that customs must continuously monitor and analyze as part of an IRM approach.
This section proposes a set of tools aimed at gradually optimizing the use of
data. In this regard, some measures are shared in Appendix D as the foundation
of these tools. The first tool seeks to summarize customs and compliance data
based on one of the analysis variables: the operator’s profile. Although many
administrations have information about their operators, it is often not exploited
through a summary tool that could provide in a timely and comprehensive man-
ner core information for analysis—without requiring special extraction
processes.
The development of a methodology to segment and assess each operator’s risk
level is the second tool discussed which aims to introduce analysis techniques. By
developing different indicators and identifying those with relative importance
within the group of operators showing irregularities, the customs fraud profile is
modeled and applied to the importers’ and/or exporters’ population.
Subsequently, the last two tools seek to delve into each operator’s risk profile
by linking their compliance level or risk with a second analysis variable: sensitive
goods. While the first method introduces a technique to identify threats and risk

©International Monetary Fund. Not for Redistribution

168 Customs Matters: Strengthening Customs Administration in a Changing World

sequences from the development of decision trees, the second proposal aims to
discover risk clusters or main recurring conditions in transactions with offenses.
This toolkit is a guide to optimize data in order to support risk management
and assist customs decision-making in at least the following functions: (1) greater
facilitation measures, (2) physical control at the borders, (3) non-intrusive con-
tainer inspection, (4) post-clearance audit plan, and/or (5) AEO approval
procedures.

Compliance History
A compliance history is a descriptive tool that consolidates general data and com-
pliance information of all operators from customs and, when possible, other
government agencies. Accordingly, an initial comprehensive profile of the opera-
tor would be created to facilitate further analysis. This tool allows customs officers
to easily understand the operator’s profile and to perform comparative analyses to
identify outliers that may pose a risk.
The proposed structure is built around the design of several summary win-
dows, considering at least the following recorded information: (1) general profile,
(2) customs data, (3) fiscal information (when available from the tax administra-
tion’s records), (4) compliance records, and (5) value analysis. Appendix E
describes in more detail the required data or data fields.

Economic Operators’ Segmentation

and Assessment Methodology
The development of this analysis allows for segmentation of operators according
to their size—CIF value—and risk level of economic operators in relation to the
goods they trade. This facilitates understanding of not only the profile of eco-
nomic operators and the goods they trade but also their evolution. Moreover, it
allows the identification of those who are most relevant in terms of value and
volume of transactions as well as the links between these two dimensions. Similar
to the previously discussed tool, its development may start from a simple version
using only customs information. Ideally, this would gradually be bolstered by data
analytics tools and/or with additional information from tax administrations as
well as other government agencies and the private sector.
Information exchange across tax and customs administrations is key to
strengthening this methodology and understanding economic operators’ behav-
ioral patterns. Appendix F explains step-by-step how it can be developed, seeking
to serve as an aspirational guide for customs to build their own methodology—
adaptable to their context.
Through the steps established by this methodology, it is possible to prepare the
data and develop a set of measures that obtain relevant and meaningful informa-
tion from each operator. During its development, a number of analyses and
techniques will identify the empirical conditions that could help explain different
forms of fraud, highlighting the operators who are susceptible to fit into this
profile. Knowing their size according to their performance in foreign trade

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 169

operations, will make it possible to determine the level of risk, or Global Risk
Index (GRI), assigned from the experience of fraud and the noncompliance levels
detected by customs—and other agencies when possible. This approach allows for
the importer and exporter population to be divided into more manageable groups
based on common characteristics and potential risks. Table 5.2 summarizes the
methodology’s outcomes. A further analysis, combined with the use of business
intelligence software, would be very useful to drill down on each segment and the
operator’s risk level.

TABLE 5.2.

Operators’ Segmentation and Assessment

Value
Operators’ Number of % of Total Transactions % of Total Value
GRI Level Operators Operators (: USD) of Transaction
Large # % $ %
High # % $ %
Medium # % $ %
Low # % $ %
Medium # % $ %
High # % $ %
Medium # % $ %
Low # % $ %
Small # % $ %
High # % $ %
Medium # % $ %
Low # % $ %
TOTAL # % $ %
Source: Authors.

Based on Table 5.2, customs can get a better overview of their total population
of importers and exporters, allowing them to apply better-targeted treatments
supported by the use of data. In addition, the GRI assigned to each trader can be
very useful as (1) a new condition in the selectivity module, (2) one criterion of
the risk profile in the AEO certification process, (3) a key input for annual PCA
planning, and (4) a component in the study of fraud links and networks.
It should be noted that this methodology has already been implemented in
several customs administrations, proving to be useful to improve information
management, guiding the development of measures to strengthen risk prevention
and mitigation. Among other countries, Chile, Costa Rica, Ecuador, Dominican
Republic, Honduras, Paraguay, and Peru have used it as a basis, obtaining signif-
icant results. For example, according to the Ecuadorian authorities, the imple-
mentation of the methodology in early 2019 helped eliminate discretionary
decisions in its selectivity system, reducing physical examinations from 38 per-
cent in 2019 to 19  percent in 2021, while the effectiveness of examinations
increased by 8 percent, and all this without compromising customs revenue.
Through the GRI, it will be possible to continue the analysis toward a second
variable of study: goods. After defining the criteria leading to sensitive goods (see

©International Monetary Fund. Not for Redistribution

170 Customs Matters: Strengthening Customs Administration in a Changing World

Appendix G), the network analysis or the study of the linkages between
operators—importers, customs brokers, suppliers, and so on—and goods is rec-
ommended for its development. Table  5.3 summarizes the methodology’s
outcomes.

TABLE 5.3.

Sensitive Goods Linkage with High-Risk Operators

Sensitive Tariff Size Number of
Code Segmentation GRI Level Importers TIN GRI
TIN 1 GRI
High
# TIN 2 GRI
Large TIN 4 GRI
Medium
# TIN 5 GRI
TIN 7 GRI
Low
# TIN 8 GRI
TIN 10 GRI
High
# TIN 11 GRI
Medium TIN 13 GRI
NNNN.NN1 Medium
# TIN 14 GRI
TIN 16 GRI
Low
# TIN 17 GRI
TIN 19 GRI
High
# TIN 20 GRI
Small TIN 22 GRI
Medium
# TIN 23 GRI
TIN 25 GRI
Low
# TIN 26 GRI
Source: Authors.

Indicator-Based Decision Tree

The decision tree introduces a methodology that links the goods and operators’
analysis with the supplier and unit price of the transaction. By assessing each
customs declaration through a set of indicators and metrics, this tool defines
whether a control action is required or not via inductive logic. The complete
methodology is found in Appendix H.
As the name of the tool suggests, the control is built according to branches and
nodes. Each branch represents a set of measures of one variable—good, operator,
supplier and price—and the node determines if the variable is risky. When all the
nodes are risky, then the transaction is selected for customs control.
In terms of the transaction, it is possible to incorporate new selectivity criteria
based on defined decision trees. Additionally, other studies and analyses may
derive from the same data set, and in all cases, it will be possible to adopt treat-
ment policies to be applied before, during, or after clearance of the goods.

Risk Cluster Identification

The proposed methodology identifies rules of interconnected combinations of
fraud. This means that the position and values of different variables—customs

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 171

brokers, goods, country of origin, and so on—will express or define a certain set
of characteristics of those importers that commit fraud.
The first step is to identify the customs declarations that register offenses
during a period of time in the same customs process, that is, during customs
clearance. Likewise, the identification of the root cause of the fraud or detected
risk can further enrich the analysis, categorizing by (1) undervaluation, (2) mis-
classification, and (3) undeclared goods, among others. The methodology is
detailed in Appendix I.
When the combination and values of data fields are defined, the risk cluster or
fraud is developed, and it is ready to identify operators and/or transactions that
match with the cluster. Additionally, a rule should be submitted as a new risk
criterion to determine the level of control assigned to each identified cluster. A
simple scheme of this methodology is described in Figure 5.6.
The cluster will be able to identify a set of importers that match with the fraud
syntax. Based on this subgroup, it will be interesting to know the level of control
applied by customs and its result. As importers are the main linkage in this com-
bination, those without customs controls should be
contrasted against their compliance history and
“
GRI value. It is possible that several of these oper- The degree of success in
ators could be the subjects of a new control strat- developing tools to opti-
egy to be applied by customs, that is, through PCA. mize data usage will
When customs administrations have the depend on the timeliness,
knowledge and experience in developing at least quality, and diversity of the
these tools and/or similar methodologies, infor-
data as well as the organi-
mation becomes a great input of risk manage-
ment. Their implementation may start on a pilot zation’s capacity to update,
basis using simple spreadsheets and evolve through extract, and exploit the
the support of scientific techniques and use of data.”

Figure 5.6. Example of Risk Cluster Identification

Risk Cluster Identification

Identification of importers Broker – Importer Supplier – Broker - Importer Supplier – Broker – Importer – ítems (HS codes)
with offences Linkages Linkages Linkages
Importers Broker 1 Importer Item Country
Subset of Broker 1 Supplier M1
operators Importer I
A
with Broker 2 B
offences Broker 2
Broker 1 Importers
…
…

Supplier M X
Points to consider: Broker 1
…

Supplier M Importer N
Broker N
Sample size (Historical information
at least 6 months) Broker 2 Broker 2 Importers A
Importer I
Exclude chapters or HS codes B
that may distort the analysis
…
…

X
Same Customs regime Importer N

Who are the customs What are the links between the If Supplier is M, Broker is 1 and Importer is I – What are the
brokers assisting these supplier and the customs broker items with the highest concentration and where do they
transactions? in these transactions? come from?

The cluster can gradually become more sophisticated

Source: Authors.

©International Monetary Fund. Not for Redistribution

172 Customs Matters: Strengthening Customs Administration in a Changing World

tools and software for data analysis and business intelligence. It is worth mention-
ing that artificial intelligence (AI) is a new technology that is beginning to posi-
tion itself as a basis for this purpose. This is explored in further detail in
Chapter  7. Analysts should be able to adapt software to the requirements and
context and ensure the principles of transparency, predictability, and timeliness of
the information.

SUMMARY
Reform priorities to improve customs compliance differ across countries and
regions, reflecting variations in stages of development and administrative capacity.
One size does not fit all; thus, reforms need to be tailored to each country’s con-
text and circumstances. However, in any case, improving compliance requires
medium- to long-term reform efforts.
To achieve greater operators’ voluntary compliance, efficiency for both traders
and customs, and organizational effectiveness of risk-based controls, an IRM
strategy is essential. An IRM approach encompasses much more than just target-
ing cargo, setting selectivity criteria, implementing nonintrusive equipment, or
acquiring analytical software; it involves the entire customs administration and its
functions. IRM should consider a wide range of key interrelated aspects, such as
governance arrangements, operational strengthening, and the implementation
and monitoring of measures and/or projects to address and mitigate the main
risks. It must therefore be part of the customs administration’s strategic and oper-
ational plans, and clearly reflected through institutional policy. IRM is also a
mechanism to increase the trade community’s awareness of compliance activities
and their confidence in the customs administration.
Finally, as with any modernization reform, the implementation and success of
IRM will largely depend on the commitment of senior management to make
structural changes—often the most difficult obstacle to overcome—thus involv-
ing the entire customs administration and ensuring the continuity of key reforms.

REFERENCES
Barrie, Russell. 2010. “Revenue Administration: Developing a Taxpayer Compliance Program.”
IMF Technical Notes and Manuals 10/17, International Monetary Fund, Washington, DC.
De Wulf, Luc, and Jose B. Sokol. 2005. Customs Modernization Handbook. Washington, DC:
World Bank.
Financial Action Task Force (FATF)—Egmont Group. 2020a. Trade-Based Money Laundering:
Trends and Developments. Paris, France: FATF.
Financial Action Task Force (FATF)—Egmont Group. 2020b. Trade-Based Money Laundering:
Risk Indicators. Paris, France: FATF.
Foley, Rebecca, and Bruce Northway. 2010. “Managing Risk in Customs: Lessons from the New
Zealand Customs Service.” Investment Climate in Practice (No. 12). World Bank,
Washington, DC.
International Monetary Fund (IMF) and World Customs Organization (WCO). 2019–2020.
“International Survey on Customs Administration (ISOCA).” IMF and WCO.

©International Monetary Fund. Not for Redistribution

Chapter 5 Strengthening the Core Customs Processes through Integrated Risk Management 173

International Organization for Standardization (ISO). 2009. “ISO 31000:2009 Risk

Management Principles and Guidelines.” ISO, Geneva, Switzerland.
Keen, Michael. 2003. Changing Customs: Challenges and Strategies for the Reform of Customs
Administration. Washington, DC: International Monetary Fund.
Widdowson, David, and Stephen Holloway. 2011. “Core Border Management Disciplines:
Risk-Based Compliance Management.” In Border Management Modernization, edited by
Gerard McLinden, Enrique Fanta, David Widdowson, and Tom Doyle. Washington, DC:
World Bank.
World Customs Organization (WCO). 2002. Revised Kyoto Convention (entered into force in
2006). Chapter 6. Kyoto Convention. Brussels, Belgium: WCO.
World Customs Organization (WCO). 2005. SAFE Framework of Standards to Secure and
Facilitate Global Trade. Updated in 2021. Brussels, Belgium: WCO.
World Customs Organization (WCO). 2012a. Customs Risk Management Compendium,
Volume I. Brussels, Belgium: WCO.
World Customs Organization (WCO). 2012b. Customs Risk Management Compendium,
Volume II. Brussels, Belgium: WCO.
World Customs Organization (WCO). 2012c. Guidelines for Post Clearance Audit (PCA)
Volume I. Brussels, Belgium: WCO.
World Customs Organization (WCO). 2012d. Guidelines for Post Clearance Audit (PCA),
Volume II. Brussels, Belgium: WCO.
World Customs Organization (WCO). 2013. “Trade Facilitation Agreement.” Article 7 (entered
into force in 2017). WTO Legal Texts—Agreement on Trade Facilitation. WCO, Brussels,
Belgium.
World Customs Organization (WCO). 2016. Guidelines for Strengthening Cooperation and the
Exchanging of Information between Customs and Tax Authorities at the National Level. Brussels,
Belgium: WCO.
World Customs Organization (WCO). 2018. Data Analysis Practitioner’s Handbook. Brussels,
Belgium: WCO.
World Customs Organization (WCO) and the Egmont Group. 2020. Customs—FIU
Cooperation Handbook. WCO and Egmont Group.

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

 CHAPTER 6

Customs Enforcement and

Cooperation with Other
Administrations
János Nagy and William LeDrew

Enforcement is a critical element of all customs administrations. The effectiveness

of an administration’s enforcement and compliance efforts impacts the economic
and social well-being of a country and contributes to its competitiveness in the
world economy. Therefore, administrations need to assign top priority to the
design, development, and implementation of enforcement and compliance strat-
egies, policies, and programs.
This chapter provides advice on how customs administrations can strengthen
their enforcement/antismuggling programs. It looks at the environment in which
customs enforcement operates, including a discussion of current and emerging
challenges and risks. It sets out a number of basic principles underlying effective
customs enforcement and compliance programs and then provides a roadmap for
their implementation and operation.
More specifically, this chapter (1) offers guidance on how to define and imple-
ment antifraud and antismuggling strategies based on assessments of current and
emerging threats and of existing capacities and performance; (2) addresses the role
of risk management from an enforcement perspective, including intelligence
gathering and analysis; (3) outlines how important fraud investigations and pre-
ventive (interdiction) services are; and (4) emphasizes the critical need for coop-
eration and information exchange between customs and other border control
agencies and with law enforcement agencies both domestic and international.
The exchange of information and cooperation with tax administrations is partic-
ularly important from a revenue collection perspective.

CHALLENGES: THE NEW ENVIRONMENT

Increasing volumes of international trade and regional trade agreements, as well
as continued dependence of governments on revenue collected at the borders,
place heavy demands on customs administrations to make cross-border trade
easier and still address cases of noncompliance. (See also Chapter 1 on challenges
customs administrations face and Chapter 4 on trade facilitation for more detail.)
Customs administrations face an ever-increasing and complex world of illegal
cross-border activities. They are expected to have in place effective strategies to

175

©International Monetary Fund. Not for Redistribution

176 Customs Matters: Strengthening Customs Administration in a Changing World

combat these growing threats. The Secretary General of the WCO states in his
Foreword to the WCO 2018 Illicit Trade Report: “Illicit trafficking of different
commodities continues to affect global peace and security, destabilizing econo-
mies and threatening the health and safety of populations. Disrupting illicit trade
flows is a very complex, multi-stakeholder process, involving many law enforce-
ment and other government agencies” (WCO 2019).
To meet these often-competing priorities, customs administrations must
devise ways to detect and suppress illegal activities, while at the same time provid-
ing efficient clearance of legitimate goods and fostering voluntary compliance.
This chapter offers advice to achieve these objectives and to address some of the
threats and risks.

ELEVEN PRINCIPLES OF CUSTOMS ENFORCEMENT

AND COMPLIANCE
The underlying principles of successful customs enforcement and compliance strat-
egies have been developed based on experiences in a number of administrations that
have undertaken modernization and reform of their enforcement programs and
these reflect what is considered good practice as set out in international standards.1
These principles must be compatible with and support the corporate objec-
tives, priorities, and policies of the administration and, more broadly, with those
of government. They provide guidance for the development of a customs enforce-
ment strategy and its various programs and initiatives and provide a framework
against which future potential initiatives and programs can be assessed. The 11
principles are outlined as such:
1. Voluntary compliance and effective enforcement are complementary
2. An organizational culture of risk management
3. Customs legislation—adequate enforcement powers and authorities
4. Interagency cooperation and coordination
5. Cooperation with tax administrations
6. An effective penalty regime
7. Transparent, quick, and objective appeal mechanisms
8. Professional and motivated customs enforcement officers
9. Effective use of modern ICT and contraband detection technologies
10. Recognition that enforcement is everybody’s business
11. International standards and best practice in customs enforcement

1
Such countries include Cambodia, Laos, Myanmar, and The Bahamas, which have developed
enforcement strategies as part of their modernization efforts. A compilation of widely respected inter-
national standards and tools can be consulted under the WCO website: http://www.wcoomd.org/en
/topics/enforcement-and-compliance/instruments-and-tools.aspx.

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 177

Voluntary Compliance and Effective Enforcement Are

Complementary
Modern customs administrations place top prior- “Effective customs enforce-
ity on increasing voluntary compliance and on
ment relies on a high degree
detecting and treating noncompliance through
risk-based verification and enforcement. A high of voluntary compliance.”
level of voluntary compliance is critical to a suc-
cessful enforcement strategy as it enables the administration to focus its verifica-
tion and enforcement efforts and resources on areas of identified high (or
unknown) risk. A fundamental principle of voluntary compliance is that most
people will comply with the law if they understand it, it is perceived as reasonable
and fairly administered, it has an intrinsic value to society, and there are mean-
ingful consequences for noncompliance. With current mounting pressures on
customs resources, increasing voluntary compliance is critical to an effective
compliance and enforcement strategy.
Voluntary compliance reduces the need for costly, time-consuming, and trou-
blesome interventions by customs and other agencies and tends to be a lasting
inclination. On the other hand, enforced compliance likely requires ongoing
interventions or the threat of enforcement in order to be sustained. The strategies
and approaches to achieving voluntary compliance with regard to post-clearance
audits (PCAs) are referenced in Chapter 4 and discussed in detail in Chapter 5.
Box 6.1 presents a brief summary of methodologies utilized by customs adminis-
trations to increase voluntary compliance.

Box 6.1. Methodologies for Increasing Voluntary Compliance

• Adopting a risk-based approach to customs processing—identifying legitimate, low
risk trade and focusing verification activities on high or unknown risks
• Ongoing assessment of the efficiency of the risk-based selection system by systematic
feedback from (1) operations (from the physical and/or documentary inspections)
and (2) traders, who are key for enhancing the risk management system and further
promoting compliance
• Providing information, assistance, and support to help clients understand and comply
voluntarily with requirements and obligations (industry outreach)
• Streamlining and simplifying customs processes and procedures to make compliance
easier and faster (reducing redundant procedures, strengthening interagency coordi-
nation, and implementing modern ICT systems)
• Reducing interventions at the time of clearance by placing greater reliance on pre-
arrival processing and postrelease verification
• Strengthening interagency cooperation and coordination among government agen-
cies that have border control responsibilities (coordinated border management) and
others that are not forward deployed as well (that is, responsible for licensing of
export controlled goods, CITES products, cultural goods, military goods, and so on) to
make compliance easier and strengthen synergies in sharing information and under-
taking joint or mutually supported control activities
• Establishing service-related performance goals and indicators throughout the
administration
• Implementing provisions of the WTO Trade Facilitation Agreement

Source: Authors.

©International Monetary Fund. Not for Redistribution

178 Customs Matters: Strengthening Customs Administration in a Changing World

An Organizational Culture of Risk Management

An organizational culture of risk management “Effective enforcement
means that the organization has accepted the
requires the commitment
importance of and applies the practices of risk
management in all decision-making. This includes to risk management princi-
high-level strategic decisions regarding programs, ples and techniques by all
resource allocation, and new investments as well levels of the organization.”
as operational and tactical decisions on day-to-day
matters, such as staff and resource allocation, verification priorities and targets,
and enforcement activities. Chapter 5 addresses in more depth the development
and application of integrated risk management, including institutional and com-
pliance risks.
The development of such an organizational culture requires commitment
from all levels of the organization (particularly senior management) to the prin-
ciples and application of risk management techniques to all facets of customs
operations, including internal management and controls. Longstanding practices
that result in commitment of resources to activities irrespective of the actual risks
involved need to be abandoned.
Furthermore, customs need to develop a data analytics culture also to better
understand the data, business processes, and information system’s limitations.
The latter are critical to understand the compliance environment.
This change in culture necessitates refocusing on the identification of low-risk
actors in the import/export chain, the implementation of facilitated systems for
them, and freeing up resources to focus on medium- to high-risk sectors/
transactions.2
This difficult change process will include internal communication and train-
ing systems to ensure buy-in by staff. Public relations and client service ensure
customs clientele fully understand the risk-based approaches to achieving compli-
ance, the advantages and benefits of voluntary compliance, and the disadvantages
and costs of noncompliance. Where an electronic single window for trade is being
implemented, the risk management approach may be expanded to include other
government agencies (OGAs) involved in the regulation and control of interna-
tional trade.3

2
The Zambia Revenue Authority has in place a good example of a corporate risk management policy.
Based on this policy, the Customs Division has implemented a risk-based compliance strategy that
facilitates legitimate, low-risk trade; focuses control efforts on high or unknown risks; facilitates vol-
untary compliance by recognizing and rewarding highly compliant (low-risk) clients; enforces com-
pliance through risk-based actions to deter, detect, and sanction noncompliance; and places greater
reliance on pre-arrival processing and post-clearance verification.
3
Mainly veterinary, phytosanitary, conformity, and standard checks could also be risk based.

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 179

Customs Legislation—Adequate Enforcement

Powers and Authorities
Customs’ governing legislation must establish the “Customs officers must
powers and authorities officers need to be effective have the legal powers and
in carrying out their law enforcement roles,
authorities needed to carry
including those needed to carry out their day-to-
day duties (power to stop and question people; out their responsibilities.”
require presentation of goods; examine goods,
conveyances and documentation; board conveyances; seize or detain goods and
conveyances; detain, investigate, search, and arrest persons suspected of illegal
activities; and disclose respective networks). Ideally, customs legislative power
should correspond to but be independent from police legislative power. Customs
investigation service should work under or in close cooperation with the prosecu-
tor’s office.
Experience has shown that customs administrations that lack essential legisla-
tive powers face major difficulties carrying out their enforcement roles and are
susceptible to legal challenges.
Customs officers assigned to specialized enforcement functions, including
antismuggling teams, fraud investigation, intelligence operations, and so on,
often work in conjunction with other law enforcement officials and require addi-
tional authorities. These include the power to carry out patrols in the customs
territory including on private property, to enter and search premises, to carry
firearms for self-defense, to share information with other agencies, to demand the
presentation of books and records (including electronic records), and to detain
such material as part of an investigation, to name a few.
In some jurisdictions, customs administrations have extended criminal inves-
tigative mandates that require exceptional powers, such as observation of the
movement of goods and people; search of people, premises, and residences; wire-
tapping; and the use of covert agents and participating in covert activities. Such
powers should come with reinforced measures and guarantees protecting citizens
against any possible misuse of powers. This may require a longer period of prepa-
ration before exercising such powers to ensure adequate training of officers and
supply of equipment. Figure 6.1 is a summary of the ISOCA survey (2019–2020)
of customs enforcement powers. As can be seen, most administrations possess
essential legislative power required to support enforcement operations.

©International Monetary Fund. Not for Redistribution

180 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 6.1. Enforcement Powers of Customs Administrations

Advanced economies Emerging markets Low-income countries
67
PCA annual audit plan exist 86
74
67
PCA 86
87
83
Powers to act in maritime zones 82
61
83
Powers to act in free zones 75
57
83
Powers to act in business premises 82
87
83
Powers to act in border zones 93
83
67
Physical border suirveillance 71
74
83
Audit at business premises 93
87
83
Desk audits 93
87
50
Officers carry weapons 50
48
42
Use of tracking devices 46
61
58
Identity verification 82
78
83
Request police assistance 93
87
83
Questioning 79
83
Controlled delivery 75
64
70
83
Access to business records 89
87
83
Seizure 86
83
Search 83
68
83
Arrest 50
36
65
58
Detention 57
74
75
Interception 79
83

0 10 20 30 40 50 60 70 80 90 100
"YES rate" responses (%)

Source: International Survey on Customs Administration (ISOCA) co-managed by the IMF and the WCO,
2019–2020.
Note: PCA = post-clearance audit.

InterAgency Cooperation and Coordination

Customs administrations must pursue all oppor- “The success of customs
tunities to work cooperatively with other enforce-
enforcement depends on
ment agencies. These include police, military,
immigration, and other agencies involved in effective working rela-
cross-border trade and travel (including foreign tionships with partner
agencies contacted through a partner customs agencies—both domestic
administration). and foreign.”

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 181

Enforcement agencies work together to take advantage of specialist expertise,

broaden the legal basis for enforcement actions, and ensure the sharing and use of
information and intelligence to maximize their effectiveness in fighting criminal
activities. Effective cooperation requires clear delineation of roles and responsibilities
between the partner organizations to avoid overlaps, loopholes, and uncertainties.
Many customs administrations have established memoranda of understand-
ings (MOUs) with other enforcement agencies to provide a policy framework and
operational modalities for working arrangements with the relevant agencies.4 This
includes mechanisms for consultation, cooperation, and exchange of information
including real-time electronic exchange; joint contribution and participation in
activities to further enhance the usefulness of information; and promotion of coop-
eration and coordination of border enforcement operations,5 particularly joint forces
operations (JFOs) and task forces. Within the framework of MOUs, customs and
other agencies develop specific operational agreements to implement joint forces
operations, to provide for the exchange of information, and so on. This interagency
cooperation has become even more important as countries address security and ter-
rorism threats. All agencies need to be fully engaged and support these efforts.

International Cooperation
International cooperation and information sharing between customs administra-
tions, other law enforcement organizations, and the business community are
essential for effective enforcement and control given the expansion of internation-
al trade and the continuing risks to the safety, security, and competitiveness of all
countries. The most widely applied instrument for customs cooperation at bilat-
eral level is the WCO’s Model Bilateral Agreement on Mutual Assistance in
Customs Matters (2004). As an international instrument, there is the WCO’s
International Convention on Mutual Administrative Assistance in Customs
Matters (known also as the Johannesburg Convention, Brussels—June 27, 2003,
but not in force yet). According to this instrument, the contracting parties to the
Johannesburg Convention commit to “provide each other with administrative
assistance under the terms set out in this Convention, for the proper application
of Customs law, for the prevention, investigation and combating of Customs
offenses and to ensure the security of the international trade supply chain.”6
Other relevant instruments include the following:
• International Convention on mutual administrative assistance for the pre-
vention, investigation and repression of Customs offenses (Nairobi
Convention)—entered into force in May 1980

4
Chapter 3 covers certain aspects of cooperation with other government agencies under coordinated
border management, and Chapter 4 deals with coordinated interagency inspection.
5
For a guideline on how to set up important cooperation agreements and/or joint interagency units with
the police, refer to the WCO/INTERPOL Customs/Police Cooperation Handbook (CPCH) at https://
cites.org/sites/default/files/eng/prog/enforcement/CustomsPoliceCoopHandbook_EN_LR.pdf.
6
This convention had 10 contracting parties in June 2020 but had not entered into force yet. See
also http://www.wcoomd.org/-/media/wco/public/global/pdf/about-us/legal-instruments/conventions
-and-agreements/johannesburg/internconvmutualadmineng2003.pdf?la=en.

©International Monetary Fund. Not for Redistribution

182 Customs Matters: Strengthening Customs Administration in a Changing World

• Regional mutual assistance agreements

• Bilateral mutual assistance agreements (both government level and customs-
to-customs)
• WCO recommendations, guidelines, and compendiums on mutual admin-
istrative assistance
Increasing consideration is given at land borders to provide a single border post
facility at selected or all border crossings where customs and other border agencies
can work under the same roof, closer to each other, or together sharing at least a
part of their work and responsibility.7 The objectives of such an arrangement are
to save costs of building and running a border post, reduce processing time by
providing a one-stop shop opportunity, and facilitate cooperation and sharing of
information by the various border control agencies operating at the same border.
Deeper cooperation can result in joint or even unilateral controls where agen-
cies of one country accept the results of controls performed by the agencies of the
neighboring country. However, careful consideration should be given to the pre-
cise description of the border control arrangements, assessment of gains and
limitations, and their exact wording in the highest possible level of bilateral
agreement. Such arrangements provide certain immunities and protection to
operations by the law enforcement agencies of the neighboring country in the
territory of the host country within limits and under circumstances agreed by the
parties sacrificing a part of national sovereignty by allowing the enforcement of
the laws and regulations of and by the authorities of the neighboring country even
against citizens of the host country and in the host country. However, most coun-
tries are very prudent in terms of presence of enforcement officials in the foreign
territory and their jurisdiction.

Cooperation with Tax Administrations

One of customs’ closest partners in fighting fraud is the tax administration. The
tax and customs administrations interact with a large part of the population and
should share the same database. Policies and rules for the use of and access to this
information must be in place to ensure all legal requirements and rights of tax-
payers are respected. Typically, all operators involved in international trade are
potentially taxpayers. The lack of cooperation and/or coordination between the
two administrations would be inevitably exploited by noncompliant traders/tax-
payers. Following are several important topics on which the two administrations
should work together. The list is not exhaustive.
• First, a shared registry is critical to manage compliance. Customs and tax
administration benefit from using a single taxpayer identification number to
record transactions in their systems. This allows data cross-matching for risk

7
Examples of joint border stations can be found in Europe, particularly among current EU members
before the abolition of internal border checks in 1995. While this section deals with international
cooperation among authorities of neighboring countries, Chapter 3 addresses coordinated border
management among authorities of the same country.

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 183

management purposes on both sides, including comparing turnover to trade

volume, detecting undeclared activities, identifying inconsistencies in quan-
tities and values of transactions, and ultimately combating noncompliance,
fraud, and smuggling.
• VAT and excise taxes on goods are necessarily comanaged by tax and cus-
toms administrations. As explained by Mann (2004), “The valuation and
classification of goods at customs offices represent the key first step in the
VAT chain that ultimately impacts total (import and domestic) VAT collec-
tions. If these steps are improperly carried out, it becomes difficult to estab-
lish an adequate invoicing system up to, and including, the retail level.”
• Customs valuation according to WTO standards and control of transfer pric-
ing are other areas of common interest that should be addressed in a coordi-
nated manner. For excise tax administration, it is critical to reconciliate inputs
(imported or purchased locally) and outputs to establish the taxable bases.
• Sharing information on exemptions and special regimes helps address pos-
sible abuse and inconsistencies on entitlement, scope and duration of these
benefits.
• As exported goods are zero-rated for VAT purposes, the exporter is entitled
to claim a refund of the full amount of VAT paid on inputs. This is an area
where the potential for false refund claims represents a significant risk.
Customs should provide assurance to the tax administration that the goods
have been actually exported. To that end, customs should carry out physical
and documentary verifications using risk assessment techniques to deter-
mine the shipments targeted to examine and the level of examinations
necessary. The tax administration should provide input into the develop-
ment of selection criteria for such examinations.
• Exchange of information on enforcement results is critical to update both
administrations’ risk register. Sharing of information on offenders, cases, and
general data on taxpayer compliance and risks is invaluable to both parties.
Sharing the list of offenders may allow the detection of noncompliance on
both sides. A fraud committed in a cross-border transaction is likely to have
consequences on tax compliance. For example, underreporting of quantity
and/or value at customs may reduce tax liabilities.8 Sharing a taxpayer’s /
trader’s compliance track record is key for the selection of audit, inspection
and investigation cases. Given the confidential nature of tax information,
clear policies and procedures on the exchange and use of such information is
essential and should be documented in formal legal agreements.

8
It is important to mention that this is not always the rule. In some instances, undervaluation of
imports, which reduces duties and VAT collected at customs, would determine higher profits and/
or better market positions upon the sale of the undervalued good. This may make the importer end
up paying more taxes provided corporate income tax (CIT) control is effective though the overall
revenue impact would likely be negative. Sometimes, foreign exchange restrictions make overvaluation
of imports attractive as a way of getting additional foreign exchange out of the country. The point is
that fraud mechanisms often change, and compliance control needs to be flexible.

©International Monetary Fund. Not for Redistribution

184 Customs Matters: Strengthening Customs Administration in a Changing World

• Cooperation can often improve the effec- “A transparent and readily

tiveness of revenue collection and arrears available appeals mecha-
management. Authorizing customs to detain
nism provides opportuni-
import or export shipments on behalf of the
tax department is a good practice. This very ties for challenges to cus-
effective collection measure also serves as a toms decisions without
general deterrent to other taxpayers. fear of retribution.”
Conversely, the debt collection unit of the
tax department has a comparative advantage to carry out complex customs-
related duty or penalty collection enforcement, for example, following
investigations or antismuggling cases.9

An Effective Penalty Regime to Support Enforcement

The penalty regime should reflect the seriousness of the contravention, take into
account past compliance records, and in the most serious offenses provide for
criminal prosecution. Although enacting this measure is up to legislative and
policy makers, customs should persuade the government to support the necessary
legislative change. Once a comprehensive penalty system is in place, it is import-
ant to use the whole spectrum of penalties, sanctions, and other measures in a
balanced way to maximize their positive impacts and achieve their main objec-
tives: to deter possible future offenders from committing fraud, recuperate lost
revenue and educate offenders.
To support this principle, customs administrations require a graduated penalty
system that aims to secure compliance through the application of penalties as part
of a customs compliance model that ensures penalties are applied uniformly,
consistently, and in an equitable manner for offenses of equivalent weight with
the overall objective of molding client attitude toward self-regulation. Penalties
should take into consideration the compliance history of the offender—a second
and subsequent incidences of the same infraction will result in a progressively
higher penalty. An example of a graduated penalty/sanctions regime is included
in Appendix J.
The application of penalties by customs officers is an area that is particularly
vulnerable to corrupt practices. Rules need to be very clear and the application of
penalties nearly automatic—there should be minimal personal contact between
customs officials and clients, if it is necessary.

Transparent, Quick, and Objective Appeal Mechanisms

A customs penalty and sanctions regime must include a readily accessible and
transparent appeal mechanism to facilitate challenges of enforcement actions in a
fair, timely, and objective manner with a clear legal basis. The appeal process
should be publicized to ensure potential appellants are aware of their rights to

9
Other aspects of tax and customs cooperation including those establishing a revenue authority (RA)
are discussed in Chapter 3, Appendix K.

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 185

appeal customs’ decisions, understand the procedures to be followed, and believe

they can rely on fair and objective decisions. Unfortunately, some customs admin-
istrations, particularly in fragile and conflict-affected states, tend to bypass formal
appeal mechanisms and rely on less formal processes of settlement, leading to
opportunities for corrupt or unprofessional settlement of cases. Such practices
undermine the credibility of the customs administration’s commitment to
enforcement and transparency.
Typically, the appeal process begins with internal appeals heard by the customs
administration. Should the appellant not be satisfied with the administration’s
decision, a further appeal to an independent, quasi-judicial external appeal body
(such as a customs appeal committee) is available. A final level of appeal is to the
courts. The appeal mechanism is also discussed in Chapter 4.
In the case of criminal prosecution actions launched by customs (which in
most jurisdictions require approval by the state prosecutor), the rules and proce-
dures related to criminal convictions determine the appeal mechanisms, usually
involving appeals to a higher-level appeal court.
Systematic feedback to operations about appealed cases should be implement-
ed in a way that customs operations understand better the main reasons of the
appeals and then undertake corrective actions.

Professional and Motivated Customs Enforcement Officers

As with all areas of customs administration, suc- “Customs enforcement
cessful enforcement operations depend on a work- depends on well-trained,
force of well-trained, highly motivated, and pro-
professional, and highly
fessional customs officers with solid records of
high performance and particularly high integrity. motivated enforcement
They must be adequately remunerated and trained staff.”
to reduce the temptation to engage in irregular/
corrupt practices. A well-constructed, active, and needs-based training program
will ensure that staff acquire and maintain the necessary competencies for
enforcement duties. This is achieved through a competency-based training needs
assessment (TNA). The TNA should be carried out as part of the planning and
implementation of the various initiatives in the administration’s enforcement
strategy.10
Often the design and delivery of specialized enforcement training require help
from external specialists. Development partners are generally prepared to provide
such support, as are international organizations such as the IMF, WCO, and
World Bank Group.
Enforcement officers should remain in their specialist positions for relatively
long periods of time as it can take several years to develop their skills and experi-
ence. All too often, an administration’s staff rotation policies see these specialized
officers moved frequently, which has a detrimental impact on their performance,

10
Chapter 2 highlights some of the challenges to customs enforcement raised by new trade patterns.
Chapter 3 discusses competency-based training needs assessment.

©International Monetary Fund. Not for Redistribution

186 Customs Matters: Strengthening Customs Administration in a Changing World

their morale, and the efficiency of training. While it is difficult to set a minimum
time in a position, experience has shown that officers assigned to specialized
enforcement teams should spend a minimum of four to five years in their
positions.

Effective Use of Modern ICT and Contraband

Detection Technologies
In today’s environment where criminals and those “Modern information and
who would evade their obligations are becoming communications technol-
ever more sophisticated and use advanced ICT
ogy systems and state-of-
technologies, customs should have the necessary
equipment and skills to obtain, secure and use the-art contraband detec-
computerized information, including in adminis- tion technology and
trative investigations and criminal proceedings. equipment are critical for
Modern contraband detection technologies, a risk-based approach to
including nonintrusive inspection devices such as enforcement.”
scanner/X-rays, spectrometers, trace detection,
and radiation detectors, as well as basic inspection tools, should be deployed to
support contraband detection. Their deployment should be based on risk assess-
ments to ensure optimal effectiveness.
Customs relies more and more on advanced ICT systems to aid efforts to
detect noncompliance using risk-based approaches. Modern enforcement ICT
systems include a case management system and an enforcement database that will
compile and store information on past offenses and offenders. Also, an intelli-
gence database that collects, stores, and analyzes intelligence information should
support enforcement operations. Such databases should be used by a risk manage-
ment system that assists customs to analyze data, assess risks/threats, and carry out
risk-based operational targeting. The risk management system should interface
with the automated customs clearance system to support targeting and selectivity
processes.
These systems should be developed as an integrated customs management
system allowing an effective and efficient use of scarce resources. Despite heavy
investments in detection technologies (in particular, the very expensive scanners),
administrations often see minimal results in terms of detections. For effective use,
these technologies must be deployed as part of a broader enforcement strategy
and plan and based on risk management principles and processes. Often admin-
istration of these expensive tools is weak with little or no targeting, incomplete
reporting systems, and insufficient management oversight. Chapter 5 delves more
deeply into risk management systems.

Recognition That Enforcement Is Everybody’s Business

Operational staff have multiple responsibilities and constantly face pressures to
facilitate and expedite trade and travelers, to provide professional and polite ser-
vice to the public, and to meet internal administrative requirements. They are also

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 187

responsible to ensure that the proper revenue is collected, that other government
agency requirements are met, and that correct data are submitted, and of course
they must be vigilant to detect and deal with noncompliance and with illegal
cross-border activities (smuggling, illegal immigration, customs fraud,
contraband—drugs, firearms, and so on). In this regard, all officers play a critical
role in customs enforcement. Customs management needs to clearly define offi-
cers’ roles and responsibilities, ensure proper training is provided, and implement
mechanisms to recognize effective performance and manage underperformance
issues.

International Standards and Best Practice in Customs

Enforcement
While enforcement programs and practices must respond to the conditions in
each country, they also need to conform with international good practice and
standards, in particular the various instruments issued by the WCO, including the
International Convention on the Simplification and Harmonization of Customs
Procedures (the Revised Kyoto Convention), the WCO’s Risk Management
Guide, Standard Risk Assessments, Customs Risk Management Compendium,
Strategic Trade Control Enforcement Implementation Guide, and the
Compendium of Customs Operational Practices for Enforcement and Seizures.
In many administrations in fragile and conflict-affected states, this adoption
of international good practice requires extensive capacity development, often with
the assistance of development partners through their various technical assistance
programs.

ORGANIZATION OF CUSTOMS ENFORCEMENT

This section addresses key issues in establishing a “There is no single organi-
customs enforcement organization. The discus- zation structure for cus-
sion is based on experience and observation of
toms enforcement.
enforcement organizations in both large and
small administrations throughout the world. However, a number of key
This complements the discussion in Chapter  3 organizational principles
that refers to the entire customs organization and practices apply to all
structure. administrations.”
There is no single correct organizational model
for customs enforcement. For instance, in developing an enforcement organiza-
tion, a decision is needed with respect to how much operational activity, if any, will
be retained at HQ. Larger administrations with many offices and complex operat-
ing environments generally have a decentralized structure with almost all opera-
tional enforcement functions delegated to the field and very little operational
activity carried out at HQ. Smaller administrations generally retain more opera-
tional activities at HQ depending on factors such as geographical area covered and
complexity of operations. As a general rule, enforcement operational activity

©International Monetary Fund. Not for Redistribution

188 Customs Matters: Strengthening Customs Administration in a Changing World

should be assigned to operational areas with HQ retaining responsibility for overall

policy and program development and direction, planning and program support,
and guidance to operations.
Reorganizing the enforcement program in a formal way presents an opportu-
nity to integrate risk management functions that are part of the overall enforce-
ment program. For example, processes for identification of low-risk traders, based
on the record of the various operators in the import/export chain, can be organi-
zationally located with more traditional enforcement functions. In addition,
development of facilitated systems such as trusted trader and/or AEO program
green channel clearance integrate well with the process of identifying and acting
on information related to higher-risk traders.
HQ level enforcement staff generally exercise functional authority over line
operations in enforcement operations. Functional authority is indirect authority
by means of development of policy and procedures, provision of advice, organi-
zation of department-wide initiatives, and monitoring results. Line operations
exercise direct or line authority in the enforcement program. Line authority refers
to direct responsibility and accountability for operations. Line managers are obli-
gated to operate within the policy and procedural framework developed by the
relevant functional authority and approved by customs senior management.

Headquarters Functional Organization of Customs

Enforcement
In an effort to better examine customs enforcement organizational structures, we
begin with a functional breakdown of enforcement starting with HQ. Key func-
tions carried out at the HQ level include the following.

Executive Leadership
The enforcement program is a critical part of a customs administration and sup-
ports customs’ key role of safety of society, border security, and the protection of
economy of the country. Thus, the official in charge of enforcement should be at
a very senior level, reporting directly to the head of the administration, equivalent
to other deputy heads, and be a member of the administration’s senior executive
committee. This brings an enforcement lens to all program and policy decisions
made by the executive committee and ensures they consider verification and
enforcement implications. The enforcement executive leads the development of
enforcement policies, programs, initiatives, and related resource allocation.
Advice is provided to the head of the customs administration and frequently to
senior officials of other government agencies, ministers, and other elected
officials.

Policy and Program Development and Planning

The enforcement organization is responsible for developing clear and well-
thought-out enforcement and compliance policies and programs and the strategic
and operational plans to implement them. These policies and programs must

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 189

support the strategic objectives and plans of the administration as well as broader
government strategies and priorities. This is a headquarters function, although
input from operational areas is essential to ensure all practicalities and implemen-
tation realities are considered. In small administrations, this function can be
carried out by a very small team of two or three experienced officers. Policies are
needed covering antismuggling, port of entry goods inspection, seizure of goods
and conveyances, intelligence and investigations, penalties and sanctions regimes,
risk management, and so on.

Program Management/Coordination and Monitoring

The HQ enforcement organization is generally responsible for the overall man-
agement and coordination of the enforcement program operations throughout
the country. This includes antismuggling operations. While generally not taking
a hands-on role in operational matters, they will plan and coordinate implemen-
tation of national projects involving several regions as well as direct any involve-
ment in international initiatives and projects. It is particularly important in the
area of enforcement that the HQ organization works closely with the field offices
in planning, monitoring, and evaluating results as well as providing expert advice
and guidance to support field operations.
HQ monitors the enforcement operations through the use of operational per-
formance management systems (OPMS)11 that provide detailed reports on activ-
ities and results. This includes both the specialized enforcement operations as well
as effectiveness of the verification efforts of checkpoint staff. Areas of weak per-
formance can be addressed by HQ in cooperation with local management. The
executive in charge of enforcement is expected to report to the head of the admin-
istration on the results achieved, challenges and emerging issues, and the effective-
ness of all enforcement operations along with recommendations for changes.

Risk Management and Intelligence Program

Development and Administration
A robust risk management program is needed to address all areas of risk. The
enforcement organization generally takes the lead in developing the needed poli-
cies, systems, and procedures in risk management and operation of the risk man-
agement program. As is discussed in more detail in Appendix K, the enforcement
organization plays a major role in the operation of a risk management committee
(RMC) that oversees the development and application of risk management sys-
tems and processes (see Chapter 5 for governance roles and the RMC). Often, the
head of enforcement takes on the role of “risk management champion” for the
customs administration. However, this may be different depending on the con-
text and particularities of each customs administration.

11
Administrations have various different systems and entities carrying out these functions such as 24/7
operational centers, command centers, and so on.

©International Monetary Fund. Not for Redistribution

190 Customs Matters: Strengthening Customs Administration in a Changing World

The customs intelligence HQ unit develops and monitors policies, proce-

dures, and supporting systems needed for an effective intelligence system.
Customs intelligence consists of two major elements—strategic intelligence and
analysis and intelligence operations. Generally, the HQ intelligence organization
is responsible for strategic intelligence development. This entails risk assessments
of emerging threats in areas such as contraband smuggling, potential areas of
customs fraud and tax evasion, security threats (terrorism/weapons of mass
destruction or WMD), intellectual property rights, trade agreement violations,
and safety and health. These strategic assessments are provided to senior manage-
ment for use in setting enforcement priorities, developing new programs and
operations, assessing existing operations, and making resource deployment
decisions.
Intelligence operations are carried out at both HQ and field levels. The HQ
intelligence office generally takes the lead and is the primary contact point for
intelligence sharing at the international level. The day-to-day development, anal-
ysis, and dissemination of tactical/operational intelligence are for the most part
carried out by field intelligence officers. They develop local sources of informa-
tion, liaise with local enforcement agency counterparts and neighboring customs
administrations, and, most importantly, support local operational customs offi-
cers through provision of local lookouts and alerts. Customs operational staff are
also valuable sources of intelligence information.

National Targeting Centers

Many customs administrations have established national risk management and
targeting centers that apply a multilayer approach to daily risk management oper-
ations. In general, the centers aim to better manage and integrate information,
develop a coordinated approach to risk management, coordinate intelligence and
operations, and better manage border risks (Aniszewski 2011).12 For the most
part, these teams focus on contraband and security risks rather than on revenue
matters.
The centers make use of advanced automated systems, strengthened pre-arrival
cargo and declaration data reporting requirements (including advanced commer-
cial supply chain data), and more sophisticated and integrated analytical tech-
niques to target high-risk consignments and operations. With the introduction of
electronic trade single windows, these units can have access to greater amounts of
data from other regulatory agencies and increasingly can address a broader range
of risks.
Common functions of centers, as reported in the WCO research paper
(Aniszewski 2011), include management of selectivity and targeting criteria,
managing risk analysis IT systems, provision of 24/7 tactical analysis and

12
This research paper includes examples of NTCs in Canada, Finland, New Zealand, and the United
States. It should be noted that emerging economies such as Brazil and Mexico also have NTCs in
operation.

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 191

coordination, coordination of risk management information exchange, and pro-

viding a platform for stakeholder coordination and better coordinated border
management.
The centers require direct access to all relevant data from all internal and
external systems, including nonintrusive inspection technology equipment
(including scanned images), all CCTV installations, and so on. The centers
should be given authority to order risk-based controls and inspections (at land
borders, in ports, at airports, and inland) and the collection of results from such
activities.
In the past, most national targeting centers were limited to customs officials.
However, in recent years, more and more centers include representatives from
other agencies with a border control/law enforcement mandate, including regula-
tory agencies, police, border patrol, coast guard, and so on.
This interagency collaborative effort can produce much improved control and
enforcement results by accessing far greater levels of information and intelligence
that can be used to identify and target high-risk operations, individuals, and
organizations.

Leading Interagency Risk Management

International initiatives such as the electronic trade single window and the trade
facilitation initiatives called for by the WTO TFA have forced many countries to
come to grips with the need to better coordinate and even integrate border con-
trol services. Chapter  4 provides more details on the  TFA.  The efficiency and
effectiveness of import and export processing (or lack thereof ) by other govern-
ment agencies have major impacts on trade facilitation, logistics efficiency, and
protecting society from harmful or dangerous goods. Streamlined and coordinat-
ed clearance systems and procedures based on risk management principles are
essential to competitive and attractive environments for investment and interna-
tional trade. Chapter 5 discusses the importance of strengthening core customs
processes through integrated risk management. Often the other involved agencies
have far less mature approaches to risk management than customs and tend to
operate in isolation with limited coordination, cooperation, or information shar-
ing. Common approaches to risk management are frequently lacking.
In many cases, customs has taken a lead role in the creation and operation of
interagency risk management processes, often driven by the implementation of
the electronic trade single-window platform. The first step in developing an
interagency risk management strategy is issuance of a government policy on
“facilitating trade through risk management” that commits (and requires) relevant
government ministries and agencies to implement international best practice in
the area of risk management, to establish interagency cooperation mechanisms,
and to build closer partnerships with the trade community.
Ensuring all relevant agencies participate in implementing the policy statement
requires creation of an interagency risk management governance structure. This
includes a high-level multi-agency steering committee responsible for overall policy,

©International Monetary Fund. Not for Redistribution

192 Customs Matters: Strengthening Customs Administration in a Changing World

strategy, planning, and oversight of the process. At the operational level a risk man-
agement coordinating committee provides the forum for operational level bodies to
coordinate and manage the ongoing processes. Each participating agency needs to
establish its own risk management committee and processes to meet its own needs
as well as to support the interagency efforts. This framework ensures that steps are
taken to implement a truly integrated (interagency) risk management process. The
customs administration typically plays a leading role in bringing about these
changes and chairs the interagency structure once operational. Chapter 4 refers to
the development of a TFA roadmap and a government-wide approach.

Interagency and International Liaison

Customs enforcement depends on effective cooperation, exchange of informa-
tion, and coordination with other national agencies with a mandate to control the
import and export of certain goods and of people as well as with foreign customs
administrations. Establishing formal arrangements with domestic enforcement/
regulatory agencies (police, other government organizations, drug control admin-
istrations, military and so on) is critical to effective border enforcement. As cus-
toms is generally the lead agency in border management, it is in a unique position
to initiate formal agreements and arrangements (often through MOUs) setting
out policies and means of joint operations and coordination, information
exchange, and so on. These MOUs are negotiated and signed off at the headquar-
ters level, sometimes at the ministerial level, and are binding on all parties.
This interagency cooperation requires that all the participating agencies com-
mit to adopting the principles of risk management in identifying goods that
require verification. An earlier section of this chapter deals with principal aspects
of interagency cooperation.

Contraband Detection Technology Development

and Management
It is well recognized that contraband detection technologies (for example, nonin-
trusive inspection technologies), when properly deployed and utilized based on
risk assessments, can be very effective tools for detection of undeclared and illegal
products. Customs administrations need to carefully consider the deployment of
these technologies based on risk assessments and priorities. All too often these
costly tools are not deployed or used effectively resulting in costs to both the
administration and traders with little return. The enforcement organization at
HQ is generally responsible for preparing plans and strategies for acquiring and
deploying these technologies, putting in place sound management information
systems, and monitoring results.

ICT Systems Development, Implementation, and Operation

Customs enforcement requires extensive information technology systems to sup-
port operations. These systems are the responsibility of the headquarters organi-
zation working in collaboration with the ICT department and other branches of

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 193

the administration. Of critical importance to customs enforcement is a function-

ing and effective IT-based risk management system. Other systems include an
enforcement database (to record all enforcement actions), an intelligence system
(to record and analyze intelligence information), a case management system (to
facilitate better management of investigations cases and operational projects), and
an operational performance reporting system (to gather and analyze performance
data on enforcement operations).

Fraud Investigation
Many developed country customs administrations have an HQ investigations
policy and program section with overall power and responsibility for the investi-
gations units in the field (policy, procedures, technical advice and guidance,
monitoring, and so on). The HQ investigations sections often include an opera-
tional section responsible for carrying out large scale, complex, and highly sensi-
tive investigations and cases covering jurisdictions of several investigation offices
that are beyond the scope of local offices, including cases involving national and
international cooperation. These senior investigators also play an important role
in technical training and development of field investigators.
Customs investigators identify cases of potential past customs fraud, carry out
forensic investigations to establish the facts, and, in cases where improper activi-
ties are uncovered, assess revenue owing and penalties according to the nature and
seriousness of the offenses. Potentially large amounts of revenue that may have
been evaded in past transactions are identified as part of customs investigations.
In cases of serious misrepresentation or fraud, investigators will initiate criminal
prosecution processes.
An important and often overlooked practice is customs investigations collabo-
ration with the court system/prosecutor’s office. In many cases judges and prosecu-
tors do not have the technical knowledge or the understanding of customs matters,
so they need help that is provided through training or information sessions.

Antismuggling Teams
Many small to medium-sized administrations deploy operational antismuggling
teams from HQ. These teams have a broad mandate to carry out operations at
both the national and local levels to address major risks and to assist local teams
with specific projects. These centralized teams also provide useful information on
the risks and effectiveness of local operations and resource deployment. In larger,
more advanced administrations such teams are almost exclusively deployed from
operational field sections. To combine efforts and to optimize results in special
crime areas, these teams often include other governmental agency officers (for
example, joint drugs and anti–money laundering teams).

Post-clearance Audit
While PCA is not part of the enforcement organizational structure, it does con-
tribute to the enforcement program. It is an essential element of a risk-based

©International Monetary Fund. Not for Redistribution

194 Customs Matters: Strengthening Customs Administration in a Changing World

verification process. Its role is to carry out audits of importers’ books, records, and
systems to verify past compliance with customs requirements. PCA entails two
principal activities: desk audits (reviews carried out in the PCA office of a trader’s
transaction records) and site/field visits (audits carried out at the importer’s prem-
ises involving a detailed audit of accounting records and systems as well as indi-
vidual transactions). Audits generate additional revenue through reassessment of
transactions and, in cases of suspected fraud, referrals to the investigations team
for fraud investigations.
PCA supports the goal of expedited clearance of goods with less intervention
by customs at the time of release while maintaining appropriate levels of compli-
ance verification. To that end, PCA typically conducts pre-approval and periodic
audits of participants in trusted trader programs (based on the WCO’s AEO
program developed as part of the WCO’s Framework of Standards), whose results
are included in the assessment of the AEO application, and on the provisions of
the WTO TFA. Strictly speaking, these audits are not enforcement/verification
focused. They are aimed at assisting applicants for AEO designation in meeting
the stringent record-keeping and internal control systems required. They period-
ically audit the AEOs to ensure that they continue to meet the program require-
ments, to identify weaknesses in their systems, and to provide advice. Specific
suggestions on implementation of an effective PCA program are contained in
Chapter 5.

Field Operations
Most enforcement operations are carried out in the field where goods clearance
takes place. However, field operations must work in close contact with HQ to
ensure consistency of operations, compliance with legal and policy requirements
and cooperation with other areas and agencies. The following paragraphs describe
these field operations and summarize their mandates and roles. Specific advice on
the establishment and operation of these operational enforcement units is con-
tained in Appendix K.

Mobile Antismuggling Teams

Most customs administrations deploy mobile antismuggling teams whose activi-
ties are focused on both contraband interdiction and revenue evasion. These
teams have proven very effective as their priority is on enforcement and antismug-
gling activities. Team members are selected based on their performance records
and professionalism and generally receive specialized training. They work in
tandem with operational line staff at ports of entry as well as with other law
enforcement agencies. Depending on the scope of the customs administration’s
mandate they may participate in border patrol operations and inland interdiction
of smuggled or otherwise clandestine goods. Such operations should be carefully
planned and, where available, based on risk assessments, specific intelligence, or
requests from operational areas or other agencies (in accordance with agreements)
or on the basis of deterrence.

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 195

Joint Forces Operations

Typically, formal agreements are in place setting out the arrangements for cus-
toms mobile teams to work with other law enforcement agencies (task forces,
ongoing joint operations including joint intelligence units). These MOUs set out
the terms and conditions of these joint operations, including roles, responsibili-
ties, authorities, management structures, reporting processes, and related admin-
istrative procedures. These agreements include specific joint forces operation
(JFO) projects and the exchange of information.

Marine Patrols
The maritime environment presents customs with numerous challenges in its
efforts to protect revenue and to detect smuggling and other illegal activities. To
address these challenges, many customs administrations with marine borders set
up marine patrol operations. A marine patrol capability requires appropriate
equipment in terms of vessels and related technologies, properly trained staff to
both operate the vessels and carry out the customs enforcement duties, and suffi-
cient financial resources. Customs-governing legislation must include provisions
that provide authority for such a program.
Before a marine unit is established, the administration should conduct a
feasibility study. This will include an assessment of the marine threat (often
carried out in consultation with other law enforcement agencies such as marine
police, coast guard, and the military) as well as a financial cost/benefit
analysis.

Field Intelligence Operations

The operation of the HQ intelligence function was outlined previously. Effective
customs intelligence requires on-the-ground intelligence officers throughout the
country. These field officers play a critical role in the collection, evaluation, and
analysis of information and serve as the contact point between the intelligence
organization and operating customs officers. In this regard, they provide intelli-
gence to the line officers in terms of lookouts, risk assessments, and briefings of
both a local and national nature. In addition to collecting intelligence from
external sources, including other law enforcement agencies, informants, and
confidential sources as well as open sources, a considerable amount of useful
intelligence information can be obtained from customs officers. They can pro-
vide information based on their experience, observations, and knowledge of
local risks obtained through their day-to-day work, which often can be used
along with other intelligence sources to help identify general and specific risks.
The intelligence officers provide regular reports to HQ that can be used to
update risk assessments and to initiate specific actions such as investigations,
antismuggling initiatives, audit priorities, and so on. Local intelligence officers
are critical to maintaining this connection with field staff and local enforcement
agencies.

©International Monetary Fund. Not for Redistribution

196 Customs Matters: Strengthening Customs Administration in a Changing World

DEVELOPING AN ENFORCEMENT STRATEGY

This section discusses the steps customs adminis- “Customs administrations
trations take to develop or strengthen customs
need an enforcement strat-
enforcement programs and operations and pro-
vides an example from one administration. The egy to guide the develop-
focus is on effective border controls (at customs ment and operation of
entry points), antismuggling operations (includ- enforcement programs.”
ing marine patrols and mobile teams), fraud inves-
tigation, customs intelligence and analysis, and post-clearance verification. We
will examine how these programs are developed and the critical part played by risk
management techniques and processes in their development and operation. The
enforcement strategy is one element of the customs strategic and operational
planning process. As such, it must be consistent with and support the strategic
objectives and priorities of the administration typically defined for a period of
three to five years and be integrated into the planning process.

The Challenge
While customs has many responsibilities in terms of trade facilitation and service
provision, its key function, particularly in fragile and conflict-affected states, is to
provide effective and efficient border controls and revenue collection. The chal-
lenge for customs is to apply these controls in a manner that minimizes impacts
on legitimate traders and allows the smooth flow of cross-border trade while
reducing the extent and impacts of illegal operations. These controls are not
applied by customs in isolation. While generally the leading agency at the border,
customs works in close cooperation with numerous other agencies with control
mandates.
Customs controls have evolved over the years, moving from transactional
controls applied at the time of entry of the goods to the use of pre-arrival risk
assessments, analysis, and post-clearance verification to provide assurance of com-
pliance. This approach has enabled customs to greatly speed up release times for
the vast majority of traders and allowed customs to reassign staff away from rou-
tine processing activities to higher value-added functions, such as risk analysis and
targeting, PCA, antismuggling, fraud investigations, and client services to support
and facilitate voluntary compliance. All these aspects of customs control must
work in harmony as part of a risk-based framework and be included in an admin-
istration’s enforcement strategy.

Why an Enforcement Strategy Matters

Experience has shown that a well-thought-out enforcement strategy outlining the
objectives, priorities, and action plans for the enforcement area is essential for
developing or strengthening a customs enforcement organization and achieving
improved results. The objective of the strategy should be to improve the efficiency
and effectiveness of customs enforcement through developing professional

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 197

capacity, applying a risk-based approach, providing modern tools and equipment

including IT systems, and strengthening operational effectiveness.

Scope and Priorities

Decisions are required on the scope and coverage of the strategy. Ideally it should
cover all enforcement and compliance verification activities in the customs
administration. This includes responsibilities for antismuggling, intelligence and
analysis, interagency and international cooperation, and marine patrol as well as
other compliance verification functions (risk management, PCA, customs inves-
tigations, contraband detection equipment, IT systems).
A great deal has been written about risk management theories and practices in
the customs world.13 This discussion centers on how administrations have used
the principles and practices of risk management to develop enforcement strategies
to maximize the return on investment of customs resources by focusing control
activities on the areas of highest risk. In order to do this, customs administrations
need to carry out threat assessments to identify the nature, extent, and impacts of
illegal activities.
The customs administration needs to respond to priorities and areas of focus
of the administration and government as a whole. Some countries will want to
focus on threats to security, safety, and health, whereas others will place greater
priority on revenue-related threats such as goods smuggling, undervaluation,
misclassification, and false origin declarations. In most cases a combination of
these threats will need to be addressed. Customs must take these government
priorities into consideration in developing the strategy.

Operational Considerations
An enforcement strategy is not developed solely to “A customs enforcement
guide the enforcement operations and organiza-
strategy is brought to life
tion of the administration: it influences all aspects
of the operations from pre-arrival processing, through development and
border controls applied by line staff, and postre- implementation of a variety
lease verification. It also contributes to the devel- of operational programs
opment of trade facilitation initiatives designed to and initiatives.”
ensure that highly reliable traders are identified
and recognized through expedited services with minimal customs intervention. An
enforcement strategy works in tandem with and supports such facilitation initia-
tives. Thus, in developing an enforcement strategy, all areas of the administration
should be involved. Once an executive decision is taken to develop an enforcement
strategy, following the approach outlined in Box 6.2 will contribute to a successful
outcome.

13
See the WCO compilation of risk management papers.

©International Monetary Fund. Not for Redistribution

198 Customs Matters: Strengthening Customs Administration in a Changing World

Box 6.2. Steps to Develop an Enforcement Strategy

Step 1. Create a task force/working group led by a senior enforcement official to lead
the development of the strategy. Members should come from all areas of the administra-
tion (operations, technical offices, like tariff, valuation, origin, and so on).
Step 2. Develop the enforcement strategy objectives, outcomes, and scope. An outline
of the contents of the strategy should be prepared and approved by senior management
at this point.
Step 3. Prepare a threat assessment to establish the perceived areas of risk to guide
development of the strategy. Typically as part of this process administrations carry out an
environmental scan that examines the external and internal environments within which
the customs administration is operating and identifies strengths, weaknesses, challenges,
and opportunities.
Internal factors include issues such as the following:
• Resource constraints
• Adequacy of customs legislation
• Effectiveness of systems and procedures (in particular ICT systems)
• The extent of a risk management culture throughout the organization
• Levels of competency and professionalism of staff
External factors include issues such as the following:
• Government expectations and priorities (for example, revenue collection, trade
facilitation)
• Business demands for improvement in service delivery
• Regional and bilateral trade agreements
• International commitments (for example, the WTO Trade Facilitation Agreement) to
facilitate trade
• New compliance challenges in preferential rules of origin and the related risk of fraud
• Supply chain security issues
The task force gathers information from a variety of sources about past illegal activities,
analyzes and assesses customs enforcement and compliance data to identify results of
enforcement efforts, identifies emerging trends, and assesses the impacts of smuggling
and fraud. In addition to local information, international sources are drawn upon such as
neighboring countries, the WCO Customs Enforcement Network (CEN) and Regional
Intelligence Liaison Offices (RILO) operations pooling operational information from all
cooperating customs administrations worldwide or on a regional basis respectively, the
United Nations Office on Drugs and Crime (UNODC), and regional organizations such as the
Association of Southeast Asian Nations (ASEAN), European Union, and so on.
Once this data has been compiled and analyzed the next step is to build on this infor-
mation and to identify future trends and emerging risks. It is useful at this point to identify
the specific commodities involved. If we use drug smuggling as an example, the analysis
would look at all drug seizures (both at the border and internally); trends and patterns in
domestic drug consumption; international reports and analyses on drug trafficking trends,
patterns, routes, and results; and so on.
The preliminary analysis is then shared with a representative team from customs (and
perhaps other cooperating agencies) at a series of workshops to test and validate the con-
clusions. The impacts of smuggling in terms of lost revenue and the entry of dangerous and
illegal goods can also be determined or estimated at this time.
Step 4. Submit the threat assessment to senior management for approval. The threat
assessment, including recommended priorities and suggested strategies, is then presented
to customs senior management for review and approval. Direction on the overall priorities,

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 199

strategies and initiatives should be provided (for example, need to strengthen data sources
and systems and analytical capabilities; more antismuggling teams to certain areas of the
border to address emerging contraband smuggling risks; need for a risk management
committee; and so on).
Step 5. Develop the strategy and action plan with resources. Following the guidance
provided by senior management, the task force now refines the strategy and develops
supporting action plans to address the identified threats, both existing and emerging. It
will also include actions to strengthen human resources and the organization, undertake
budget reallocations or realignment of resources, update automation support systems, and
so on.
Step 6. Approval of the strategy by senior management and implementation. The final
strategy with supporting action plans and goals is presented to senior management for
review and final approval. Decisions will be made on matters such as recommended chang-
es to the organization or realignment of responsibilities and resource allocations, specific
enforcement initiatives and so on. The strategy also should include performance
indicators—both quantitative and qualitative—that are critical to assess the success of the
strategy in meeting its goals. The strategy is now ready for implementation.

Source: Authors.

Appendix L includes an outline of an enforcement strategy prepared by a devel-

oping country’s customs administration. Appendix K provides specific advice and
guidance on the creation and operation of a number of critical enforcement pro-
grams described earlier, including customs mobile antismuggling teams, customs
investigations, customs intelligence, PCA, customs marine patrols, deployment of
contraband detection technologies, and a penalty and sanctions regime.

MANAGING CUSTOMS ENFORCEMENT

Customs enforcement programs and operations require effective management
oversight in order to assess the extent to which goals and objectives are achieved
and the effectiveness of resource deployment and to ensure they are functioning
in accordance with their terms of reference and legal authorities. To achieve this,
customs management puts in place operational performance management sys-
tems (OPMS) that collect and report information on critical measures of the
efficiency and effectiveness of enforcement. Much of the data required is available
from the various automated systems that in some cases can be linked directly to
the OPMS. In addition to regular reporting of achievements against operational
plans and goals, the OPMS provides quantitative and qualitative data on results
achieved within each of the program areas (antismuggling, investigations, intelli-
gence, border enforcement, PCA, and use of detection technology). Box 6.3
displays a sample of operational enforcement performance indicators in use in a
number of customs administrations and is presented for illustrative purposes.
Higher numbers and percentages do not necessarily indicate the intended and
right change in performance.

©International Monetary Fund. Not for Redistribution

200 Customs Matters: Strengthening Customs Administration in a Changing World

Box 6.3. Sample of Operational Performance Indicators

• Number of inspections
• Percentage of shipments inspected
Physical cargo • Percentage resultant (hit rate)
inspections (import • Number of offenses detected
and export) • Revenue assessed (duty, tax, penalties)
• Number of cases referred for investigation follow-up
• Comments/observations on program
• Number of containers/shipments scanned
• Percentage of containers/shipments scanned
• Number and percentage of scans resultant
Cargo scanner
• Revenue assessed (duty, tax, penalties)
activity
• Number and value of seizures (illicit drugs and so on)
• Number of cases referred for investigations follow-up
• Comments/observations on program
• Number of enforcement actions (seizures, charges filed)
• Revenue assessed (tax, duty, penalties)
Antismuggling
• Number and value of seizures (illicit drugs and so on)
teams
• Number of cases referred for prosecution
• Comments/observations on program
• Number of cases concluded (by type)
• Revenue assessed (duty, tax, penalties)
• Additional revenue actually collected
• Number of cases referred for prosecution
Investigations • Number of convictions
• Number of appeals and their outcome
• Joint investigations undertaken (by agency—for example,
tax department)
• Comments/observations on program
• Number of intelligence cases concluded
• Number of intelligence alerts/bulletins issued, referrals made
• Number of enforcement actions as a result of intelligence
Intelligence • Value of enforcement actions
• Revenue (duty tax, penalties)
• Contraband (number and value)
• Comments/observations on program

International
• Number of international cases, by country
cooperation

• Desk audits:
º Number conducted
º Revenue assessed (duty, tax, penalties)
• On-site audits:
Post-clearance audit º Audits completed with positive results / total number of
audits conducted
º Revenue assessed (duty, tax, penalties)
º Number of cases referred to investigations
º Comments/observations on program
Source: Authors.

©International Monetary Fund. Not for Redistribution

 Chapter 6 Customs Enforcement and Cooperation with Other Administrations 201

Further examples of key performance indicators for enforcement are provided

in Appendix A to Chapter 3.

USE OF INNOVATIVE TECHNOLOGIES FOR

INTELLIGENCE AND ENFORCEMENT
Some developed customs administrations are taking advantage of innovative
technologies like blockchain, cloud computing, big data analysis, and artificial
intelligence to pilot their use for customs purposes. As discussed in Chapter 7,
these technologies represent a potential for customs to use in enhanced risk assess-
ment, security of supply chain, data analysis and data capture, nonintrusive cus-
toms control, and so on.14

SUMMARY
This chapter presents some basic principles that underpin customs enforcement
and provides practical advice and guidance on the development and implementa-
tion of a number of enforcement programs, initiatives, and potential organizational
options. As the environment and challenges facing customs administrations con-
tinue to change, they must adapt and evolve to respond to these developments.
This is a continuous process of renewal and growth. A sound legal basis, effective
organization, and clear strategy that ensures that appropriate principles, policies,
and programs are in place and risk-based deployment of resources are critical
factors to a successful enforcement program.
The need for interagency and international cooperation and coordination has
intensified, given the risks and threats nations face to security, safety, and eco-
nomic well-being from international crime and terrorism. Successful implemen-
tation of specific enforcement initiatives and programs to address existing and
anticipated risks and threats requires careful planning and development, adequate
financial resources, and the assignment of sufficient numbers of qualified staff.
Effective performance management systems are needed to ensure management is
able to monitor performance results and make adjustments as required.

REFERENCES
Aniszewski, Stefan. 2011, June. “WCO Research Paper No. 15, Risk Assessment/Targeting
Centers—Study Report.” http://www.wcoomd.org/-/media/wco/public/global/pdf/topics
/research/research-paper-series/15_rac_en.pdf?la=en.
IMF and WCO International Survey on Customs Administrations (ISOCA). 2019–2020.
http://www.wcoomd.org/en/media/newsroom/2021/november/release-of-the-report-on-the
-inaugural-round-of-the-isoca.aspx.

14
For more information, refer to the WCO research papers at http://www.wcoomd.org/-/media/wco
/public/global/ pdf/topics/research/research-paper-series/45_yotaro_okazaki_unveiling_the_potential
_of_blockchain_for_customs.pdf.

©International Monetary Fund. Not for Redistribution

202 Customs Matters: Strengthening Customs Administration in a Changing World

Mann, Arthur  J.  2004. “Are Semi-Autonomous Revenue Authorities the Answer to Tax
Administration Problems in Developing Countries? A Practical Guide.” Development
Alternatives, Inc. with the Georgia State University and the Boston Institute for Developing
Economies https://pdf.usaid.gov/pdf_docs/PNADC978.pdf?origin=publicationDetail.
WCO 2018 Illicit Trade Report, Published in December  2019. http://www.wcoomd.org
/-/media/wco/public/global/pdf/topics/ enforcement- and- compliance/ activities-and
-programmes/illicit-trade-report/itr_2018_en.pdf.
WCO Model Bilateral Agreement. 2004, June. http://www.wcoomd.org/en/topics/enforcement
-and-compliance/instruments-and-tools/~/media/DFAAF3B7943E4A53B12475C7CE
54D8BD.ashx.
WCO SAFE Framework of Standards. 2021. http://www.wcoomd.org/-/media/wco/public
/global/ pdf/topics/facilitation/instruments-and-tools/tools/safe-package/safe-framework-of
-standards.pdf?la=en.
World Trade Organization, Trade Facilitation Agreement. 2017. https://www.wto.org/english
/docs_e/legal_e/tfa-nov14_e.htm.

©International Monetary Fund. Not for Redistribution

 CHAPTER 7

Customs Administration and

Digitalization
Tadatsugu Matsudaira and Jonathan Koh

This chapter discusses opportunities and challenges presented to customs admin-

istrations by information and communication technologies (ICT) and other
modern technologies. It examines why some customs administrations struggle
with low performance despite having implemented modern ICT for operations.
It then discusses some potential causes of low performance, including persistent
as well as newly created manual procedures in declaration processing, incomplete
exploitation of ICT declaration processing systems’ functions, inadequate ICT
support to enterprise-level management or back-end operations, and the inability
to process and analyze data. Considering the root causes of low performance
while technologies are available, the chapter also reviews the potential customs
application of various disruptive technologies, such as data analytics, artificial
intelligence, and scanned image analytics.

OPPORTUNITIES AND CHALLENGES PROVIDED BY

ICT IN CUSTOMS ADMINISTRATIONS
The COVID-19 outbreak in 2020 reconfirmed “Some customs adminis-
for the world the benefits of ICT. Thanks to ICT trations struggle with low
use in customs procedures,1 customs administra-
performance despite hav-
tions can be resilient against a raging pandemic
like COVID-19 and secure supply chains without ing modern ICT.”
compromising social distancing, trade facilitation,
or levels of compliance. ICT are ever-evolving technologies, and customs admin-
istrations should continue to exploit the opportunities presented for reform and
modernization. This should not be limited to customs procedures but also
include the critical supports to the organization’s decision-making, including

1
Today, 99 percent of customs administrations have some form of ICT customs clearance system
according to the author’s calculation based on the data in “WCO Members’ Profiles—Automated
Clearance System” (WCO 2020).

203

©International Monetary Fund. Not for Redistribution

204 Customs Matters: Strengthening Customs Administration in a Changing World

resource mobilization planning, institutional risk management, and enterprise

performance assessment.
In some countries, customs administrations have implemented ICT for several
years but did so in a perfunctory manner that did not derive much real benefit.
There is a need for mitigation measures to identify the cost incurred by continu-
ing the obsolete business process, conduct business process reengineering, and
ensure effective change management among customs managers and staff. These
mitigation measures may add more time and delay in ICT implementation but
are worthy to reduce conflict cost and to maximize benefits of ICT use in the
future.

Evolution of Digitization to Digitalization2

In the 20th century, the early ICT adopters, par- “Customs administrations
ticularly the “communication” part, were mainly
are in the journey from dig-
developed countries. As trade volume rose and
with limited increases in human resources, these itization to digitalization.”
customs administrations turned to ICT automa-
tion as a means to clear goods efficiently with effective control.3 Progress in several
other areas continued—for example, harmonizing the implementation of legisla-
tion, reducing face-to-face contact, keeping track of operations to fight corrup-
tion, transforming paper-based processes toward increasingly paperless customs,
removing discretionary human intervention, and increasing accountability for
decisions. Entering the 21st century, developing countries also started adopting
ICT in their customs operations.
Early ICT initiatives by customs administrations were “digitization” efforts,
rendering paper to digital artifacts first, while the transformative “digitalization”
undertakings took longer. Early “digitization” efforts culminated in standalone
systems with no interface to each other (see “Silo Mentality” in this chapter).
Similarly, as the public became accustomed to the use of ICT, many trade-related
other government agencies (OGAs) followed suit. Members of the trading com-
munity found themselves having to use a myriad of such systems, for example,
import certificate application systems. These OGAs’ systems deal with the same
goods consignment as customs while there is often no interface among these
systems, creating redundant manual data entries and repetitious data residing in
these systems.

2
For the purpose of this chapter, digitization is used as merely the conversion of analog to digital,
and digitalization is defined as the use of digital technologies and digitized data to impact how work
gets done and how the organization embarks on its digital transformation to create impactful results.
3
Early in the 1980s, United Nations Conference on Trade and Development (UNCTAD) launched
the ASYCUDA, which is the customs clearance ICT program with the largest market share in the
world (ASYCUDA software is free of charge), while other in-house and third-party products are also
well used.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 205

As manual data input is not resource-efficient and has a high risk of input
errors and data manipulation with corrupt motives, the silo systems are gradually
being connected to each other and with customs clearance systems for electronic
data exchange. Electronic data exchanges save resources in inputting, checking,
and correcting data entry; they prevent data manipulation and secure data integ-
rity and consistency by comparing and reconciling the systems’ data, which sig-
nificantly enhances customs operations, for example, cargo traceability. In the
21st century, the internet became more ubiquitous, and customs clearance sys-
tems in developing countries were gradually upgraded to be web-based with
increased interoperability with other ICT systems.4 Customs administrations seek
better and wider connectivity in three ways: within the customs administration (for
example, customs clearance systems and other silo systems and electronic devices,
such as cargo tracking devices); between the customs ICT system and other national
parties’ ICT systems (for example, tax-customs data exchange, trade single win-
dows, port community systems); and between the customs administration and
foreign partners (for example, foreign customs administrations, chamber of com-
merce, quarantine). Standardization of data models, such as the WCO data
model,5 facilitates interface and interoperability across different ICT systems
through a standard vocabulary, definition, format, and quality standards for
exchanged data.
Several models capture such evolving stages of ICT use in organizations. This
section introduces a model specifically designed for the customs area, the Digital
Customs Maturity Model (DCMM),6 the concepts of which are summarized in
Figure 7.1.
As indicated in the DCMM, the progress in a customs administration’s ICT
adoption is guided by a three-staged “vision”: smart clearance, efficient risk man-
agement, and effective controls. It is also supported by two-staged policy instru-
ments: data security and protection and business continuity plan. It is important
to understand that ICT implementation is a continual journey based on the
national priorities, policy considerations, and resource availability of each cus-
toms administration. The DCMM identified six stages of ICT maturity in cus-
toms administration, and many low-income countries struggling within the first
two stages, “initiate” and “implement,” may consider DCMM as a benchmark for
their everlasting journey to better use of ICT.

4
For example, this is the main purpose of migration from ASYCUDA++ to ASYCUDA World.
The biggest difference is in the electronic message’s structure: fixed-length data elements with elec-
tronic message syntax were used before the internet while variable-length with tags for data elements
were used with internet. Since all the data elements have tags, electronic data message syntax that
is unique to each electronic message template is no longer used, significantly facilitating electronic
message exchange.
5
WCO Homepage (http://www.wcoomd.org/DataModel), living contents and kept updating.
6
DCMM was proposed by the World Customs Organization (WCO) in 2017. More general models
are, for example, the Software Engineering Institute’s Capability Maturity Model Integration (CMMI)
and Google’s Digital Maturity Model.

©International Monetary Fund. Not for Redistribution

206 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 7.1. Digital Customs Maturity Model

Business continuity plan

ility
dictab
nd pre
Effective
controls

cy, a
con sisten
ibility,
ity, vis
mobil Embark
ities :
s capabil Enhance
es
Busin
management
Efficient risk

Engage • E-commerce • Development of

solutions
Vision

Consolidate • e-CBM • Automated 24*7

GNC Utility blocks
• Mutual
• Integration of clearance
Implement • Advance e-services, for • Exchange of
recognition
electronic • NII image
example, integrated information with interoperability
Initiate information declaration, partner
• Data • Interoperability of

Data security and

• Data integrated e-payment government
standardization harmonization single windows
• Data capture of system agencies • Use of emerging
• E-processing of • Pre-arrival

protection
transactions • Interactive services • Development of technologies,
declarations and
Smart clearance

• Website processing • Joint targeting/risk single window

clearance • Risk for example,
• Publication of management system environment drones
• Dematerialization management • Joint inspection • Cross-border
information of supporting
• Office systems management exchange of
documents • Post clearance • Mobile apps information
Automation
audit

Skills set and

Governance ICT
Digital strategy Legal basis competencies of
structure infrastructure personnel

Maturity
Source: WCO 2018a.

DCMM may appear to have ICT maturity centered on a workstream of cus-

toms clearance processes. Many customs administrations have worked on another
workstream, customs back-end operations, including risk management profiling,
databases supporting valuation, cargo inspection, post-clearance audits, tariff
management, guarantees and bonds, warehouses, authorized economic operators’
schemes, and so on. Some countries call such systems “customs management
systems” (CMS). Many customs administrations in developed and some develop-
ing countries have worked on another workstream, enterprise resource planning
(ERP).7 ERP is for organizational management support, notably, assessing the
current situation and supporting corporate-level decision-making, for example,
investment planning and associated human resource reallocation. (Details are
discussed in “Weak Enterprise-Level Management Support” in this chapter.) The
interlinked ICT systems for the three workstreams help customs reform and
modernize the “administration,” not only “procedures.”

Challenges, Pitfalls, and Mitigation Strategies

ICT has been adopted in customs administrations since the 1980s. There has
been notable progress, but there are still many aspects of customs management
that have not fully harnessed ICT technologies. For example, ICT systems have
often been applied in limited scope, primarily to automate the customs clearance
processing. Outside customs clearance processing, ICT can and should be applied
to support management decision-making—the raison d’être of ICT investment

7
For example, Jordan’s ERP is similar to or sometimes used as a synonym for business intelligence
(BI) or management information (MI).

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 207

for institutional modernization—but few developing countries’ customs admin-

istrations have used ICT in this area. The following paragraphs discuss major
challenges and pitfalls in the use of ICT and also mitigation strategies against
these.

Persistent Manual Procedures

Unlike decades ago, fewer customs administra- “Low-performing customs
tions today face reluctance and deliberate sabotage administrations continue
of the introduction of ICT customs clearance manual procedures while
systems. Nevertheless, several customs administra- ICT solutions are
tions are still hesitant to fully exploit the function-
available.”
ality of ICT systems; worse still, some introduce
new manual processes that undermine the merits of ICT. The situation persistent-
ly creates vulnerability in control and corruption.

Face-Vetting
Several customs administrations persist in requiring traders to submit the hard
copy of the declaration with a handwritten signature, along with hard copies of
supporting documents to the customs office for processing the declaration. Until
this is done and formally accepted by customs officers, customs does not start
processing the declaration even if all the declared data are stored in the clearance
processing ICT system. This practice, dubbed face-vetting, is obsolete and was
vividly exposed through social distancing requirements in the COVID-19 pan-
demic. Accepting electronic copies while allowing for deferred physical submis-
sion8 can mitigate such practice. Where proper risk assessment is done, a substan-
tive portion of consignments can be accorded the green channel (no control)
treatment; thus, customs does not need the supporting documentation. Face-
vetting at the outset of the declaration process is unnecessary.

Cargo Management
Through the use of customs clearance systems, declaration processing in many
countries is automated, albeit to varying degrees. However, some developing
countries do not activate the ICT modules for cargo management areas, notably
those relating to manifest, transit, bonded warehousing, and temporary admis-
sion. For example, if the manifest is not well managed, customs controls support-
ed by ICT are only on declared cargo while many cargoes may have arrived in the
country but may not be declared (possibly smuggling). Cargo management is not
related to goods’ value but the lack of it exposes the customs administration to
other issues, such as the inability to trace and reconcile data, and vulnerability to
revenue and other control leakage (for example, illicit drugs, explosives). It is also
closely linked with physical release of the cargo.

8
Submission of documents can be within a certain number of days after the start of the declaration.

©International Monetary Fund. Not for Redistribution

208 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 7.2. Customs Valuation Pre-Declarations (Illustrative Examples)

Usual import declaration

Cargo arrives
Import Automated Documentary
declaration selectivity verification for
valuation
For example, 30 percent

Customs valuation pre-declaration

Documentary Import Automated Documentary
verification for declaration selectivity verification for
valuation valuation
100 percent For example, 15 percent

Pre-arrival declaration (for example, immediate release)

Documentary Automated
Pre-arrival import Automated Import
verification for
declaration selectivity declaration
valuation
Manual
For example, 30 percent

Source: Authors.

Customs Valuation Pre-Declarations

Some customs administrations have introduced new manual procedures that
undermine customs clearance automation. One example is “customs valuation
pre-declaration,” in which traders are obliged to submit the value of their goods for
customs verification prior to the goods’ arrival. Customs valuation pre-declarations
may be a good trade facilitation practice as pre-arrival data processing on the con-
dition that it is similarly automated and supported by the ICT system’s selectivity
and that there is no duplication with selectivity on the same shipment before the
import clearance. In some countries, this condition is not met where overall time
required to release the imports may be reduced but traders’ time and cost to deal
with customs would increase (because of 100 percent documentary verification at
the customs valuation pre-declaration stage). Figure 7.2 compares ordinary import
declaration, customs valuation pre-declaration, and pre-arrival declaration.

Silo Mentality
The divergent goals of customs, in terms of revenue collection, trade facilitation,
border security, and so on, can induce a “silo mentality,” also known as “depart-
mentalization,” in which there is a reluctance to share information outside one’s
division and across the organization and there can be a tendency to increase one
division’s output at the cost of other divisions’ results or the administration’s
results. This has a negative impact on the corporate culture of customs and the
efficiency and effectiveness of the administration. Divisions within customs
administrations often do not want to lose their authority or influence within
the administration, resulting in a fear of integration efforts or changes to existing
applications and silo systems9 that do not interface with each other. These

9
Such silo systems may include valuation support databases, offense databases, anti smuggling sup-
port databases, trader compliance record databases, dispute settlement tracking databases, exemption
regime management databases, passenger management, licensing management, document manage-
ment, human resource databases, payroll, and intranet for the dissemination of internal and admin-
istrative information.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 209

standalone systems often hold the same data as elsewhere, causing duplication
and possible data inconsistencies.
The silo systems are often developed within “Low-performing customs
divisions without considering customs-wide IT do not have an administra-
policies or the IT division’s support. These divi- tion-wide ICT strategy,
sional systems may not comply with customs
and divisions create their
administration-wide IT policies, such as procure-
ment, hardware/software licensing, after-service own silo-systems without
contracts, anti-virus software, standard data mod- interfacing with others.”
eling and coding, data accessibility controls, and
data protections. Under such circumstances, the interoperability between the silo
systems or with the customs clearance system is difficult. Creation of an inclusive
ICT strategy covering the entire customs administration’s departments/divisions,
operations, and services is a mitigation measure and will open a path to further
reform and modernization.10

Weak Enterprise-Level Management Support

Customs administrations worldwide face the daunting challenge of moderniza-
tion. For many administrations, technology has emerged as the platform for
modernization and is a catalyst for various services to converge. To keep abreast
with modernization, customs administrations are expected to go beyond auto-
mating customs procedures to leveraging existing and new technologies to
transform into high-performance organizations, harnessing digitalization and
improving service quality for stakeholders as well as contributing to a positive
business climate that is conducive to national economic progress. There are
indeed many corporate issues beyond procedures, for example, enterprise resource
planning (ERP), institutional risk management, human resource management,
organizational performance and productivity management, and training and
development.
A commonly observed phenomenon in low-performing customs administra-
tions is that ICT investment in corporate-level issues is marginalized. Some
customs administrations have only focused on digitizing customs clearance pro-
cedures and not digitalizing the institution per se (WCO 2016). This approach
may be a result of the nature of customs ICT projects, which is predominantly
for thematic issues, such as trade facilitation, but it is myopic: failure in revenue
collection, trade facilitation and enforcement, or any other problems of poor
performing customs administrations are rooted in a lack of accurate management
information. The result is that decisions on investment and resource allocation do
not address root problems and poor performance can persist or be exacerbated.
Therefore, customs administrations should prioritize ICT investment for
organizational reform and modernization in order to ensure management effi-
ciency and to appropriately assess the performance of its operations. In addition,

10
For example, the time stamp data for control and the ID of the officer who did the control are stored
in the customs clearance system and can be shared with the HR management system for performance
assessment (for example, Cameroon).

©International Monetary Fund. Not for Redistribution

210 Customs Matters: Strengthening Customs Administration in a Changing World

a focus on human resources development, the allocation of appropriate resources,

and the implementation of appropriate training for customs officers is necessary
for effective customs operations. Since customs officers require highly technical
knowledge and practical expertise, these training programs must be aligned with
actual policies and operations.
Many ICT initiatives and projects have shown
that public sector organizations generally have “Low-performing customs
different organizational structures and manage- do not adopt ICT to
ment cultures than their private sector counter-
improve management
parts. Nevertheless, private-sector management
approaches present some good practices worth decision- making.”
examining. Examples include comprehensive
ERP, strategic planning, human resource management, and breaking down silo-
oriented structures to integrate key planning and management functions and
structures to one enterprise-level process.
In recognizing the tremendous benefits gained from ERP, several public sector
organizations have, in recent decades, taken a significant step by implementing
ERP systems in an effort to integrate structures and to provide better governance
and transparency. An ERP system covers, among others, the following common
functional areas:
• Financial accounting: For example, general ledger, fixed assets, payables, receiv-
ables and collections, reconciliation, cash management, financial consolidation
• Management accounting: For example, budgeting, costing, cost manage-
ment, activity-based costing
• Human resources: For example, recruiting, training, rostering, career record,
payroll, benefits, retirement and pension plans, diversity management, sanc-
tion record
• Project management: For example, project planning, resource planning, proj-
ect costing, work breakdown structure, billing, time and expense, perfor-
mance units, activity management
• Data services: For example, various “self-service” interfaces for staff and
external stakeholders
The ERP system often incorporates best practices. An ERP adapted for the
public sector is often dubbed as government resource planning (GRP) where the
software structure, modularization, core algorithms, and main interfaces are spe-
cifically adapted for government agencies.
All the preceding functional areas are lacking in the majority of ICTs in low-
performing customs administrations, and these areas are often the under-
performing functions within the customs administration. One of the key benefits
for customs administrations to adopt an ERP approach is that it helps in coordi-
nating the disconnected and uncoordinated data, information, resources, and
assets within the administration while helping to integrate the various computing
systems to provide a seamless overview to enable strategic planning and decision-
making. With ERP, customs management can have timely and accurate data

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 211

collection to assess both the surrounding operating environment and customs

performance, all of which can be used to make timely and reliable decisions at the
corporate level.

Disconnect between the Customs Clearance Processes

and Back-End Operations
Although most administrations have customs clearance systems, they often find
it difficult to implement other complementary components, such as customs
back-end operations, as a coherent use of ICT within the customs administration.
Digitalization progress has been patchy, as the lion’s share of efforts has been on
automating the customs declaration procedure. Quite often, information silos are
built within the customs administration, where the declaration processing system
is detached from other customs back-end operations, such as risk management,
ERP, revenue accounting, or human resource planning. There has been less effort
and investment in applying ICT to automate the back-end processing, improve
front- and back-end coordination, and enhance organizational performance.

Selectivity
As described in detail in Chapter  5, customs clearance systems have selectivity
modules of various effectiveness that filter declarations by predetermined selectiv-
ity criteria. If the selectivity criteria are poorly determined, the results will be poor
targeting and excessive control with little results. “Silo Mentality” in this chapter
explains that without proper management at the customs administration level,
each division/unit may add its selectivity criteria11 and the selectivity may end up
with more controls, which is contrary to the original objective of more targeting.
Therefore, a cross-departmental risk management support ICT system, which is
different from the customs clearance system but mutually interfaced, is necessary
to improve the selectivity criteria management, including weighting by prioritiza-
tion. Such risk management support systems can only function with quality
information, notably control result reports, intelligence information, and data
analysis, which many low-performing customs administrations lack.

Data Reconciliation
Another disjointed area is the poor data reconcili- “Low-performing customs
ation during customs clearance processing. In
do not use ICT in cargo
reality, most customs clearance systems have this
functionality, but some customs administrations management and data
do not activate it. Manifest and declaration data reconciliation.”
must be reconciled to ensure that all discharged
cargo is covered by a customs regime. If there is a discrepancy in the reconcilia-
tion, it indicates a high risk of diversion (smuggling). Similarly, discrepancies

11
For example, under-value, under-quantity, tariff slippage, origin fraud, eligibility fraud, intellectual
property infringement, explosives, firearms, illicit drugs, and so on.

©International Monetary Fund. Not for Redistribution

212 Customs Matters: Strengthening Customs Administration in a Changing World

between transit departure data and arrival data, warehousing in/out and inventory
data, and temporary admission entry and exit data are all illustrative of the neces-
sity for data reconciliation. Very interestingly, (1) these areas often belong to one
of either the law enforcement division, cargo control division, or a division
responsible for monitoring the physical state and movement of cargo and not to
the import procedure division; (2) these areas are the most vulnerable to smug-
gling (entering without declaration) and diversion, and there is little information
about the situational reality or control results; and (3) the lower the performance
of customs, the greater the likelihood that these functions have not been
activated.

Tax–Customs Data Exchange

Many developing countries have launched trade single-window projects through
which trade and declarations data are exchanged between customs ICT systems
and OGAs’ systems, but several of them have not yet realized data exchange
between tax administration systems and customs systems. These two administra-
tions are very often under the same ministry, and tax–customs data exchange is a
promising practice. Chapters 3, 5, and 6 deal with the advantages of customs–tax
cooperation in revenue collection in more detail.
There are several options for realizing tax–customs data exchange. The keys to
success are (1) using transactional data12 and not aggregate data and (2) data
protection and privacy policies and practices in place to protect proprietary busi-
ness data. Some countries (for example, Benin) create a common electronic plat-
form in the Ministry of Finance through which one administration’s staff, duly
authorized, can share and access data from the other administration’s system.
Other countries like Cambodia have developed direct interfaces between the two
systems. If budget is a concern, a quicker fix is to allow system access rights to
members of the other administration’s staff (for example, customs risk manage-
ment staff have access rights to the tax administration database).

Compliance with Data Privacy and Protection Legislation

Customs administrations handling confidential business information need to take
appropriate measures to conserve the privacy and protection of the data, as
required by legislation. Import declaration data contain businesses’ confidential
information, which competitors may want to obtain—for example, the name,
address, telephone number, and so on of the exporter and the manufacturer, the
imported goods’ description, prices, and the quantity.13
In recent years, there has been a spate of new legislation in many countries
regarding the protection of data and privacy rights—for example, the EU’s
General Data Protection Regulation (GDPR) and the Personal Data Protection

12
Transactional data are data linked to individual trade transactions, in other words, individual cus-
toms declarations. They are not publicly available because of trade secrecy.
13
Corruption cases were reported in Central Africa region, stating that customs officers sold confi-
dential business data to the importer’s competitors.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 213

Act (PDPA). These laws have reshaped how public administrations approach data
privacy and the protection of information. Under GDPR/PDPA, customs admin-
istrations are defined as “controllers and processors of personal data” and must
have in place technical and organizational measures to ensure an appropriate level
of security to ensure that there is no misuse, loss, unauthorized access, undesirable
disclosure, and unauthorized alteration of data to prevent any risk of litigation.
When assessing the appropriate level of security, customs administrations must
consider the risks that data processing presents, particularly from accidental or
unlawful destruction of, loss of, access to, or disclosure of personal data.
Due to the multiple challenges and opportunities that the GDPR/PDPA
brings, customs must be proactive to prepare to meet these challenges, as compli-
ance requires considerable effort in reforming how customs store, use, share,
maintain, and record personal and other sensitive data, which requires significant
changes to current processes and systems.
For this reason, customs administrations must “Strengthened privacy and
ensure that all their ICT systems are well protect-
data protection becomes
ed against both unauthorized internal usage,
external attacks, and data leaks. To be GDPR/ an inevitable agenda for
PDPA compliant, the mechanism for treating customs’ use of ICT.”
personal data should integrate appropriate data
protection principles and safeguards (for example, using pseudonymization or full
anonymization where appropriate). Customs administrations must deploy their
ICT systems with privacy in mind, for instance, using the highest-possible privacy
settings by default, so that data sets are not automatically publicly available and
cannot be used to identify an entity, natural, or legal person. No personal data
may be processed unless this processing is done under one of six lawful bases:
consent, contract, public task, vital interest, legitimate interest, or legal require-
ment. When the processing is based on consent, customs must have a provision
so that the data owner has the right to revoke the consent at any time. Data
exchanges are to be restricted to legitimate data receivers with the equivalent level
of compliance with GDPR/PDPA.
In addition, the structure of employees’ and contractors’ legal agreements
under which they access or use data on the customs systems must protect the
privacy of taxpayers and traders. Customs administrations must put in necessary
measures to prevent data leaks and to quickly mitigate the negative impacts of
such leaks in the event of an occurrence. All staff should understand the sensitiv-
ity of customs and trade data. Data protection and loss cannot be the responsibil-
ity of an individual unit or individual staff; it must be institutionally owned by
senior management leading a cross-functional effort covering all stakeholders.

Inability to Process and Analyze Big Data

Customs administrations are accorded wide legislative powers to require economic
operators to submit data which are mostly in structured form (manifest, declara-
tion). In addition, semi-structured or unstructured data in form of X-ray and
photo images, scans of supporting documents, video recordings, data from devices

©International Monetary Fund. Not for Redistribution

214 Customs Matters: Strengthening Customs Administration in a Changing World

such as weighbridges, cargo tracking Global Positioning System (GPS), data from
e-commerce parcels, and more add to the tsunami of data collected by customs
administrations. The reality is customs administrations are ill equipped to leverage
all these data. Furthermore, most data are not adequately shared but remain
sequestered within the customs clearance system or other silo-systems until they
are deleted to make way for new data. The lack of storage capacity, data mining,
and analytical expertise creates a situation where customs is unable to make pro-
ductive use of these data for improvements or refinements to customs processes.
The importance of leveraging customs data should be recognized not only by
customs or its parent ministry but by the government as well. The range of trade-
related data that customs holds places it in a unique position to leverage these data
through data science in multiple varied ways beyond just the confines of customs.
Through data anonymization, other parties including the public and private sec-
tors can utilize such data to forecast emerging patterns and do better planning.
Customs administrations should seek more investments from their govern-
ments to derive the full benefit and even explore new revenue channels by mon-
etizing the massive data they collect.

Poor Design and Management of ICT Projects

There have been many examples of failures in customs ICT projects, which were
exacerbated by inadequate planning, inexperienced project teams, and poor
design and implementation. There have been customs clearance ICT installation
projects suspended due to a shortage of budget. Such overspending was often
attributed to delays in project progress—for example, delays due to failure of
equipment tendering or a government procurement agency’s scrutiny while exter-
nal experts’ cost augments as they are idling for the next phase. Also, when there
was no shortage of funding for the project, the lack of the prerequisite business
process reengineering (BPR), the appropriate organizational restructuring, legal
reform, and change management process resulted in a customs clearance ICT
system in place but with little change in customs performance.
Often, ICT projects were left to the technical “
Experiences show that
staff to direct, which led to unsuccessful results as
there was an overemphasis on the technical aspects digitization of obsolete
while neglecting the business and managerial procedures can block fur-
needs. Instead of business improvement, these ther customs reform and
endeavors automated obsolete procedures and risk modernization.”
became irrelevant—digitization but not digitaliza-
tion.14 Anecdotal experience indicates that digitization of obsolete procedures can
block further customs reform and modernization. For example, often heard is
“This business process is obsolete, but we invested a substantive amount in its
digitization, and we do not want to be criticized for wasting this investment; thus,

14
Hammer (1990) has accused managers of having focused on the wrong issues, that is, technology
in general—and, more specifically, information technology—has been used primarily for automating
existing processes rather than using it as an enabler for making non-value-adding work obsolete.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 215

we need to continue using this business process” and “Changing the digitized
business process is costly; thus, although we know the benefits of the new business
process, we will keep using the current business process.”

Governance and Financing of Customs Clearance ICT Systems

Governance of customs clearance ICT systems is often left aside while it is key to
success or failure and sets the characteristics of the system through spending and
investment decisions. In many countries, the customs clearance ICT system is not
only for customs revenue collection but also for cargo management and other pur-
poses. There are many diverse system users.15 Each of them may request to improve
the system for their own interest, but there should be a longer-term agenda, such as
enhancing security (access control, cyber security), improving resilience against
system interruption, business continuity planning (BCP), and disaster recovery
planning. The question is how to coordinate and prioritize these requests. The
governance models observed in the world are Ministry of Finance (MOF); special
board (options: board members are composed of only MOF directors, mixture of
ministries, mixture of representatives of both public-sector and private-sector users);
special purposed company set up by law (options: fully owned by MOF, owned by
shareholders including private sector); and outsourced private sector.
Financing decisions are often linked with governance (for example, the case of
special purpose vehicles [SPVs])16 and are also important for sustainability of the sys-
tem. For system installation, two funding sources are popular: government self-funding
and donor funding. Except those in fragile countries that lack project management
capacity, donor-funded projects are usually “recipient-executing projects” where ten-
dering and procurement responsibility belongs to the country subject to prior consent
of the donor.17 Therefore, these two financing models are de facto similar.
Recently, a third option of financing has emerged: the build-operate-transfer
type of public-private partnership (BTO-PPP), where the government does not
pay for system installation. The company will build and operate the system at its
own cost and recuperate its investment (and return) through collecting a user fee
from the private-sector users until the contract expires, when the system, infra-
structure, and equipment are transferred to the beneficiary country.18 Since this is
a bilateral contract between the government and the service provider, the con-
tract’s contents are often not disclosed. A cautious approach is necessary before
signing the contract, and attention should be paid to whether the user fee rate is
reasonable, the agreed service levels (including upgrade) and how to assess if the

15
For example, cargo owners, warehouse operators, road transport operators, customs brokers, banks,
freight forwarders, maritime transport agencies, airline companies, guarantors, and OGAs.
16
An SPV is an entity created only for the purpose of execution of the project, which is different from
the government agency or the private company while it/they may sponsor the SPV.
17
Thresholds are set by type of procurement whether explicit consent is required, or non-objection is
obtained automatically after the certain period of time.
18
For example, Nigeria customs clearance ICT system and single-window systems in Benin and Côte
d’Ivoire.

©International Monetary Fund. Not for Redistribution

216 Customs Matters: Strengthening Customs Administration in a Changing World

service levels are met, how the knowledge and assets necessary to continue oper-
ating the system after the contract expiration are transferred to the customs
administration, and how to define the detailed status of the expiration of the
contract. The contracts often contain capacity development articles which how-
ever lack details, and general training, such as the customs valuation method, is
provided but not much on knowledge transfer of management and maintenance
of the ICT system in question. Customs clearance ICT is a country’s critical soft
infrastructure and monopoly; tying the custom clearance system contract with
other services (for example, transit management, X-ray scanning services, and so
on) requires careful examination. There can be a risk that a country relies too
much on the use of this company’s services. In other words, if these terms are clear
and the money value meets the services, this can be an option.
Secured financing for the running and mainte-
“The governance structure
nance costs is critically important for sustainabili-
ty of the system, for example, running the opera- will characterize the cus-
tion, maintenance of tariff tables, modifications toms ICT system through
based on new legal provisions, system debugs, spending and investment
improvements in useability, and system upgrades. decisions.”
Most low-income countries and some other coun-
tries (for example, Japan) collect a user fee that may be kept in a public–private
trust fund or directly finance the system operator. Different countries have differ-
ent fee types, rates, and fee mixes (for example, registration fee, annual subscrip-
tion fee, data volume usage fee, and so on). Donors such as the World Bank,
seeing the sustainability of the system as imperative, usually request the creation
of a user fee schedule with collection methods, for which technical assistance is
also provided. A “customs clearance fee” has a long history and has been accepted
by GATT/WTO for decades.19 From the perspective of sustainability of the sys-
tem,20 attention is needed to certain trade agreements that waive the user fees on
goods originating in certain countries. In addition, although it is debatable
whether the government can or should collect a user fee for compulsory use for
taxation, this concept is very common in tax administration ICT system projects.
Here, again, the characterization of the customs clearance ICT system and its
governance model becomes important.

Going beyond Digitization, Opportunities for Digitalization

in Organizational Reform and Modernization
As explained earlier, some customs administrations seem stuck in digitization and
unable to achieve digitalization, which is the leveraged use of ICT technologies
and digitized data to create the real digital transformation. Digitization has played

19
Sometimes called customs processing fee. General Agreement on Tariffs and Trade (GATT)/WTO
accepts this provided that it is published, nondiscriminatory, and service-rendered.
20
A GATT panel interpreted that the exemption from the user fee granted to imports from certain
countries increased the burden to the goods from the other countries (GATT 1987). Also, it was
reported as inconsistent with the MFN obligation while this interpretation was not the disputed issue
and the consistency with GATT Article XXIV (other regulations of commerce) is not clear.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 217

a key role in customs reform and modernization. As seen in Chapter 1, the cus-
toms administration is a multifaceted government agency, and the application of
digitalization, done in a coherent and well-planned manner, is now a priority.
The first step is for customs administrations to undertake a comprehensive
review of their ICT applications to manage the shift to where the leveraged use
of innovative technologies is applied in a holistic and integrated manner. In this
regard, publicly available literature provides examples of successful ICT practice
in the customs context.21 Recognizing the transformational importance of ICT, it
is useful for customs administrations to align their ICT investments with organi-
zation and national goals as well as the priority in a structured manner. This
practice, commonly known as enterprise architecture (EA), supports digital trans-
formation, ICT growth, and the modernization of ICT. EA provides a template
for defining the objectives, standardizing business operations, and incorporating
systems in different layers, and applying proper governance rules. The EA
approach helps customs administrations design and build an integrated ICT
environment to achieve desired benefits.
In this way, the linkage between organizational goals and priorities and ICT
efforts becomes very clear and provides the necessary context in which management
can exercise effective decision-making to leverage ICT. It enables a balanced and
clear decision-making process, where the different levels—strategic, tactical, and
operational—can be aligned. This avoids the pitfalls where the implementation of
ICT is skewed toward operational and tactical aspects yet is underused in strategic
planning, decision-making, performance management, and resource utilization.
Digitalization or digital technologies can be used to enhance customs admin-
istrations in the following manner:
• Increased automated processing: Many customs administrations deploy a sig-
nificant number of staff to process manifests and declarations lodged online,
for example, to reconcile the information, verify the data with supporting
documents, validate the goods’ classifications and valuation, and so on.
There can be increased use of automated processing to reduce the manual
processing. The lodged data can be digitally analyzed with increased accura-
cy using disruptive technologies described in the next section.
• Changing the nature of declarations: With technological advancements, the
amount of data required to be lodged by the declarant can be lessened by
customs collecting the supporting document information from the sources
instead of from the declarant.22 For example, the issuance of permits and
licenses from other government agencies can be easily verified by customs,
which only needs a reference number and not the license itself. This can
eliminate the need for the declarant to enclose the permit or license with the
declaration, thereby saving time and effort. The same can apply to certifi-
cates of origin (C/O). Through such source data verification (SDV),
verification of authenticity that consumes customs resources can be reduced

21
For example, see WCO 2018a.
22
The WCO also advocates such a practice (WCO 2012).

©International Monetary Fund. Not for Redistribution

218 Customs Matters: Strengthening Customs Administration in a Changing World

along with the volume of submissions. Going beyond this, the importer can
simply send a message to customs that all the information is ready for cus-
toms clearance processing, and it invites customs to remotely visit the trad-
er’s ICT server to audit the necessary documents. In this case, the nature of
the process changes from “submission” to “declaration of the start of cus-
toms audit and control.”
• Changing the location of processing: Technologies enable customs officers to
operate remotely (for example, valuation and back-office functions). With
modern ICT, such functions can be centralized in centers of excellence,
which would solve persistent problems of inconsistent rulings and shortage
of skilled staff for all the border posts.
• Growing use of behavioral insights as a compliance tool: To continue leveraging
the vast volume of data amassed by customs, growing numbers of customs
administrations have reported the increased use of data mining and analytics
to gain improved behavioral insights into trade and supply chain processes.
Through “open data initiatives,”23 customs can share data and insights with
other departments and ministries (for example, planning to design more
practical economic policies and interventions).
• Smarter compliance and risk management: Customs administrations have to
take an increasingly proactive approach to compliance management and risk
management and where possible seek to intervene proactively and at earlier
stages in the import process rather than at the point where a declaration has
been filed.
• Introduction of governance by design: The increased availability and sharing of
data now allow governance by design approaches to cover a variety of data
sources, including use of blockchain technologies to secure trust in chains
of information.

DISRUPTIVE TECHNOLOGIES: FEATURES,

OPPORTUNITIES FOR CUSTOMS, AND CHALLENGES
Common Features of Disruptive Technologies and
Implications for Customs Administrations
The term disruptive technology can be defined as one that displaces an established
technology and “disrupts” the industry or a groundbreaking product that creates
a completely new industry (Christensen et al. 2016). The principles of disruptive
innovation create an opportunity for customs administrations and stakeholders to
take a step back, analyze their current situations, and identify what areas can be

23
Open data initiatives is an emerging trend among governments acknowledging that government
data have many intrinsic values and that when they are made accessible to individuals, organizations,
and even other government agencies, they can be promoted in new ways, innovations, and collabo-
rations to realize their full potential.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 219

improved and where opportunities exist that can benefit from innovative solu-
tions and more.
The pace of technology in the private sector is always faster than in the public
sector to advance its thirst for higher profits. Customs should recognize where dis-
ruptive technology can be used to keep pace with the private sector. Adapting and
leveraging these technologies to tackle the evolving risks and threats is critical to
customs’ future success. Table 7.1 indicates where and how disruptive technologies
can contribute to mitigating the major risk and threats in customs operations.
TABLE 7.1.

Major Risks and Threats That Customs Faces and the Potential of Disruptive
Technologies
Opportunities
for Use of
External Driver Leading to Risks Disruptive
and Threats Technologies Examples
Increased volumes and complexities of inter- Large Web-enabled trusted exchange of
national trade: For example, proliferation of electronic C/O between FTA partners
free trade agreements (FTA); complex
preferential rules of origin
New business models and requirements: Large Use of tokenization,24 for example,
E-commerce and small parcels; innovative unpaid invoices as tokens, to open
methods of moving goods across borders more financing options for small and
and trade financing; crypto currency; tax medium-sized enterprises (SMEs),
base-erosion and profit-shifting besides the traditional banks
Increased security threats and organized Large Applying machine learning (ML) /
crime: Terrorism; pandemics; illicit activities; artificial intelligence (AI), for example,
financing terrorists and organized crimes enabling digital ID, for improved pro-
through evasion and avoidance of duties filing and targeting, interception of
and taxes; cross-border fiscal fraud; smug- content and traffic data, forensic anal-
gling of drugs, prohibited goods; money ysis, detection, tracing and disrupting
laundering; and counterfeit goods crimeware
A new approach to the “border”: New mea- Large Use of nonintrusive inspection (NII)
sures for border control; authorized eco- technologies, Internet-of-Things (IOT)
nomic operation (AEO) initiatives; devices (drones, sensors, GPS) and
biosecurity biometrics for enhanced coordinated
border management
Diversified demands for control from society: Moderate to Use of paperless trade platforms (sin-
Anti-corruption, equality, public health, large gle window, port community sys-
biosecurity, fauna and flora, environmental tems) and social media, chatbots, to
concerns meet demands and expectations
New trading patterns: Increased number of Large Cloud computing, Federated
connected parties; trust; 3D printing Architecture (FA), 5G networks
enhance connectivity
Increase in revenue fraud: Threats related to Moderate to Leverage data mining, big data, AI for
duty and tax evasion and avoidance large accurate classification and valuation,
and fraud detection

24
Tokenization uses a database, called a token vault, which links the sensitive value with the token (a
random set of characters). The sensitive data in the vault are often via encrypted and secured.

©International Monetary Fund. Not for Redistribution

220 Customs Matters: Strengthening Customs Administration in a Changing World

Considerations in Applying Disruptive Technologies in

Customs Administration
Disruptive technologies are very attractive, but there are four common consider-
ations that apply to customs administration:
• Customs have to discern between hype and the actual usefulness of these
technologies. It is important that customs leaders be fully abreast of the
promise and usefulness of such technologies as well as any pitfalls.
• Cost-benefit or return on investment analysis should be carefully conducted
and alternative options examined. Newer technologies may cost more than
traditional ones, with the possibility of hidden costs. Hence, it is important
for customs administrations to be clear-minded about the desired outcomes
and how these technologies can deliver these in the most cost-beneficial
manner. Customs also should be aware that the cost may be incurred not by
it but by traders. Also, not taking newer technologies may be costly as non-
productive legacy technology continues and new opportunity misses.
• Many of these disruptive technologies inherently bring forth data streams
from new sources. This generates even more data. Rich data are always use-
ful provided that customs builds the associated capabilities to harness the
increased data. Failing that, customs would be swarmed in seas of data
without gaining any benefits.
• Lastly, technologies are tools and not the objectives. They are ever-evolving,
and today’s disruptive technologies will become obsolete in the future.
People are innovative: fraudsters can be beneficiaries of disruptive technol-
ogies; it is easily imagined that fraudsters will run artificial intelligence (AI)
to find out how they can smuggle goods without being detected by customs.

Possible Implication of Disruptive Technologies

to Fragile States25
While the customs clearance ICT system is not a disruptive technology, it may be
the most critical element for fragile states (FS) customs administrations to prop-
erly collect revenue, do fiscal reporting, control commercial fraud, produce trade
statistics, and fight against smuggling of firearms, illicit drugs, and other anti-
social items. Nevertheless, FS have tremendous difficulty installing and running
such ICT systems for several reasons—for example, budget constraints to build
data center buildings and procure processing and network servers and other nec-
essary equipment and recruit or outsource IT operators for hardware, data entry
screen design, coding, and table and data maintenance; local customs staff do not
have experience in working with ICT; and so on.
Disruptive technologies may provide possible support to FS customs adminis-
trations in several ways. Cloud computing would reduce the needs for a local data

25
See more discussion on customs administration in fragile states in Chapter 1.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 221

center, a full set of equipment, and IT operators by using a foreign server and IT
operators—mitigating the constraints of infrastructure and budget. Table and
data management, selectivity criteria management, and document verification
can be jointly conducted with an outsourced company (as on-the-job-training
[OJT]), where tariff classification would be supported by artificial intelligence
with natural language processing. Physical inspection is supported by contracted
foreign experts situated outside the country through real-time compressed video
communication and augmented reality technology (as OJT). An X-scanner is
provided by donors for security control and its operation, including assessment of
the scanned image, and is supported by real-time compressed video communica-
tion and scanned image analytics with automated threat detection. Certainly,
there are prerequisites to realize this, particularly the development of high-speed
and secure telecommunication networks enabling cloud computing and other
data exchange with foreign servers. If fiber optic communication is not available
or not reliable, satellite data communication can be considered. Although cloud
computing and satellite data communication incur costs, they may be cheaper
and more reliable than building a local data center and procuring a processing
server and equipment. In using outsourced services, a transparent and account-
able service contract with clear service level agreements is desired; otherwise such
a contract should be a term contract with clear exiting clauses including transfer
of knowledge and facilities.

Data Analytics
As mentioned previously, customs administrations are voracious collectors of
data. Three vectors—volume, variety, and velocity—are useful to understand how
“big data” is very different from old school data management. “Volume” is com-
monly associated with big data because the volume of data handled by the
customs administration becomes unprecedentedly large. With the advent of
cross-border e-commerce (see Chapter 2) and the shift from “containerization to
parcelization,” the volume of data submitted to customs will soar exponentially.26
“Velocity” is the measure of how fast the data are coming in. For example, a
cross-border e-commerce operator has geared up its operations to process 16,000
packages per hour in China. The “variety” of data that customs can obtain reaches
almost staggering and incomprehensible propor-
tions, such as unstructured and semistructured “Without data analytics
scanned documents, X-ray images, video feeds,
capacity, customs would
and GPS readings.
The ever-improving ability to mine big data by just be swarmed in seas of
utilizing data analytics tools represents the big driver data without gaining any
in trade today. Customs administrations have to benefits.”

For example, China Customs reported that it handled 1.89 billion inward and outward parcels on
26

November 11, 2011, which is a popular shopping day known as “double eleven” in China. China
Customs processed over 16 million overseas manifests in just one day (WCO 2018b).

©International Monetary Fund. Not for Redistribution

222 Customs Matters: Strengthening Customs Administration in a Changing World

rethink how they will use data to gain new insights or experiment by looking proac-
tively into new questions. Data analytics is the process of examining raw data in order
to identify patterns and draw conclusions. It is to obtain, cleanse, review, analyze, and
pull insights from raw data for more effective operations and to provide support for
better strategic decision-making.
Although there are different approaches and outcomes of data analytics based
on the objectives, data availability, and resource availability, data analytics meth-
ods can be broadly grouped into the following four stages (Gartner analytics
ascendancy model [Laney and Kart 2012]) (indicating an order of maturity
assessed by difficulty and value gained):
• Descriptive analysis: What happened and/or what is happening now based
on historical and incoming data
• Diagnostic analysis: Reviewing past performance to determine causes
• Predictive analysis: An analysis of likely scenarios. The deliverables are usual-
ly a predictive forecast.
• Prescriptive analysis: Reveals what should be done. This is the most valuable
kind of analysis and usually results in recommendations for next steps.
In exploiting data analytics, there are a few major constraints that customs needs
to consider and address the following:
• Data storage and quality: Firstly the ability to store and archive the tsunami
of data is a prerequisite. Not all data had been stored in the past, and storage
of data incurs a cost, although storage has become increasingly affordable.
With a better appreciation of its great intrinsic value, customs needs to
invest in more data storage. Data quality is the next challenge where great
attention is needed. Obtaining quality data can be achieved by data cleans-
ing of the original source and correcting data issues during the extraction,
transforming, and loading (ETL) phase.
• Knowledgeable staff: As referenced in Chapter 3, this is an area where com-
petency gaps particularly exist. Customs administrations need to create a
conducive environment to advance data analytics by establishing multidis-
ciplinary teams of trained data scientists. One approach currently being
pursued by some customs administrations is the establishment of data ana-
lytics centers of excellence, staffed with data scientists skilled in data mining,
algorithms, predictive analysis, probability models, and other techniques.27
They may report directly to the customs senior management in handling
sensitive information. The recruitment of such qualified staff who are in
high demand can be daunting; therefore, special employment schemes
might be needed to attract them into customs work.

27
For example, WCO launches BACUDA (BAnd of CUstoms Data Analysts), a collaborative research
project aiming to develop data analytics algorithms for customs administration.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 223

• Adequacy of ICT systems: Additional investments in ICT equipment and

software are needed for data analytics. These include large data storage and
warehouses and software programming languages (such as R, which is open
source). Customs should explore the possibility of using cloud-computing
models to service its data analytics needs (see “Cloud Computing” later in
this chapter).

Artificial Intelligence (AI)

Artificial intelligence (AI) traditionally refers to an artificial creation of humanlike
intelligence that can learn, reason, plan, perceive, or process natural language.
Machine learning (ML) is a particular approach to AI that makes use of learning
algorithms to make inferences from data to learn new tasks, identify patterns, and
make decisions with minimal human intervention. ML can be regarded as a
method of data analytics that automates predictive analysis. The more data, the
better the ML and logical output. Figure 7.3 depicts the relationship between big
data analytics, machine learning, and AI.
ML can be conducted as supervised or unsupervised by humans. In supervised
ML, “labeled data” are used—meaning these data are already tagged with the
correct answer. Supervised ML learns from labeled training data and predicts
outcomes for unforeseen data. Supervised ML from historical data will be very
helpful for effective risk assessments and accurate targeting decisions. Unsupervised
learning, on the other hand, does not have labeled outputs, so its goal is to allow
the model to infer within a set of data points. An unsupervised ML approach has
been tested in work on fraud detection, misclassification and underreporting
declarations (de Roux et al. 2018).28 The obtained results apparently demonstrate
that the model doesn’t miss on marking declarations as suspicious and labels pre-
viously undetected tax declarations as suspicious, increasing the operational effi-
ciency in the tax supervision process without needing historical labeled data.
Use of AI presents a tremendous opportunity given the big data collection in
customs. AI provides the ability to make sense of the vast, ever-increasing data to
detect and predict patterns accurately and at greater speed than humans. AI’s
potential contribution to customs is vast, including the following:
• Modeling duties and taxes collection patterns to ensure the appropriate
duties and taxes are collected at the border
• Realizing auto-classification of HS code of commodities based on natural
language processing, ensuring improved classification, and applying the
right tariff rates29

28
Brazil customs, for example, applies AI in import declaration processing. It has had the AI learning
the different types of irregularities in the declarations, for example, tariff classification, country of
origin, eligibility of imports (licensing), eligibility of preferential duty rate, and exemption.
29
Pilots have started in China (UN/CEFACT 2020).

©International Monetary Fund. Not for Redistribution

224 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 7.3. Relationship among the Fields of Big Data Analytics, Machine
Learning, and Artificial Intelligence
Big data BDA applied to the
business domain becomes
analytics business intelligence.

Big data Analytics

It is the computational
Data Statistical
Data mining process of discovering
visualization analysis patterns in large data sets.

Artificial Machine Natural language processing

intelligence It provides the learning capability learning Machine learning algorithms can
which is a defining characteristic be used to develop models to
of intelligence (and thus of Al). recognize combination of words
as more/less probable.

Learning mechanism Approaches/algorithms

Dominant approach in
Supervised Unsupervised machine learning related to
Deep learning the algorithm of neural
Reinforcement learning
network (in multiple layers).

Source: Giordani 2018.

• Identifying anomalies more quickly and thereby enabling customs staff to

focus on areas of noncompliance
• Improving cargo selectivity and targeting using predictive analysis
• Enhancing scanned image analysis to improve detection efficiency and aug-
ment operator effectiveness
• Deploying chatbots with an intelligent knowledge base for better customer
service
As mentioned earlier, data accuracy is critical for “Data accuracy in machine
data analytics, and that applies for AI as well; as
reading is important; AI
the IT adage goes, “garbage in, garbage out.”
This critical weakness can sometimes be exploit- without it can become
ed by miscreants who wish to influence AI’s “garbage in, garbage out.”
logical reasoning for their own nefarious reasons.
One common example is the spoofing of AI-enabled facial recognition. The
introduction of fake or inaccurate data to customs could create faulty logical
reasoning leading to wrong conclusions and a distrust of the accuracy
of AI. Therefore, robust security policies and transparent redress mechanisms
should be put in place to ensure the data integrity and ongoing improvement
of AI processes.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 225

The fact that AI logical reasoning is superior to humans in some ways will
create significant fear of change in some customs staff. Certain staff positions
could be replaced by  AI.  Therefore, the administration needs to guard against
risks to implement such analysis and against possible sabotage. Robust change
management and optimal resource reallocation plans should be well prepared.

Scanned Image Analytics

The advent of shipping containerization and the birth of “inter-modalism”30 gave
rise to the use of nonintrusive inspection (NII), particularly X-ray container scan-
ners, in customs. The terrorist attacks in New  York and the Pentagon on
September 11, 2001, brought to the fore the urgent need to protect borders more
stringently, and yet facilitate legitimate trade. A subsequent WCO resolution
highlighted the critical role of NII in border security (WCO 2005). Moreover,
the rise of cross-border e-commerce brings about new challenges: how to detect
contraband in the voluminous parcels and curb revenue leakages and other
breaches.
A typical X-ray container scanner can scan between 35 to 50 containers per
hour,31 while a high-speed parcel scanner can screen 2,500 parcels per hour. The
analysis of scanner images is a challenging visual task, even for trained image
analysts. The scanned images tend to be cluttered, often with other objects that
can closely resemble the targets of interest. In containers in which a variety of
goods is present, the imaged objects are in varying and overlapping shades, com-
plicating their interpretation. As such, human error, compounded by eye fatigue,
increases the risk for undetected illicit cargo.
Automated image identification is a promising technology that can signifi-
cantly aid the need for rapid and accurate analysis of scanned images. Current
efforts to develop automated image identification and risk assessments with arti-
ficial intelligence (AI) are mainly in developmental or pilot stages, and widespread
common use has not yet been realized.32 The major scanning technology provid-
ers are working on algorithms that will enable machines to recognize the catalogue
of objects. Automated image analysis can be separated into image preprocessing
and image understanding:
• Image preprocessing is a broad category including any treatment made to an
image in order to help understand it by either humans or algorithms. Image
preprocessing includes image manipulation; image correction, quality
improvement, and denoising; material discrimination segmentation; and
threat image projection (TIP).

30
A concept that one transportation contract encompasses different modes of transport and
transshipments—for example, ship, train, and road vehicles.
31
Thanks to a combination of radiography and computed tomography (CT), three-dimensional
images are possible.
32
For example, the Netherlands and Japan respectively apply AI for image analytics in X-ray inspec-
tions while few results are obtained.

©International Monetary Fund. Not for Redistribution

226 Customs Matters: Strengthening Customs Administration in a Changing World

Figure 7.4. Assisted Selection and Assisted Inspection

Assisted selection
Random sample
+
Image Image Image Selected human
All cargo Risk analysis
formation preprocessing understanding cargo operator
+
Intercepted due
to intelligence
Automated image analysis

Assisted inspection

Random sample
+
Selected Image Image Image human
All cargo Risk analysis
cargo formation preprocessing understanding operator
+
Intercepted due Automated image analysis
to intelligence

Source: Rogers and others 2016.

• Image understanding concerns decisions that are made based on the image
contents. It is split into automated threat detection (ATD)33 and automated
contents verification (ACV).
By leveraging advanced data analytics and machine learning, ATD/ACV algo-
rithms can be developed to achieve automated image analysis and identification.
There are three steps for automated image analysis: collection of the images, the
learning process for recognizing characteristics of images and automatic identifi-
cation, and auto-detecting and flagging suspicious characteristics as inspection
targets. Figure 7.4 shows a model process diagram for the X-ray cargo inspection
process and possible uses of automated image analysis: assisted selection and
assisted inspection (depending on the timing of scanning).
With ACV, the classification of the goods (HS code) can be automatically
assessed from scanned images. Through this, ML-enabled ACV can help flag
irregularities between the detected goods and the description in the customs dec-
laration and riskier goods. For the ML, a critical constraint plaguing the wider use
of automated image analysis is the lack of historical data sets of images of sizable
volume for accurate ACV. Customs has often regarded X-ray scanned images as
single use, and they are not stored or archived due to limited storage capacity.
Today, customs’ inability to store can be easily overcome, as advanced image
compression technology and much cheaper data storage ease cost concerns.
Another constraint with ML occurs in certain contracts where X-ray scanning
is outsourced to private service providers and the scanned images are contractually
their property. In such cases, customs administrations have no image database
unless it is obtained from the provider, which might incur additional costs. Such
contracts should be revised to ensure that all data belong to customs
administrations.

33
It is also known as automatic threat recognition (ATR).

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 227

Recently, customs administrations have been considering a central image anal-

ysis center so that all scanned images from border sites are centralized and expe-
rienced image analysts are pooled together. For this purpose, a unified file format
(UFF) for X-ray images has been developed and adopted by all major scanner
equipment manufacturers. The UFF aids the buildup of a nationwide centralized
scanned image database where ML tools can run through images in sufficient
quantities (usually millions) to build fairly accurate ATD algorithms.
While images of non-threat cargoes are abundant, images of threat cargoes are
fewer, thereby forcing the reliance on staged threat images. This is a common
problem in the application of supervised ML for image analysis, whereby the lack
of reference images to “train” the algorithms affects the accuracy of
the ATD. Recently, researchers have begun to test ML where staged threat images
are projected into an innocuous stream of images while adding realistic variations
to bring balance between the threat and non-threat algorithms. Through interna-
tional cooperation of customs administrations, the buildup of a sufficiently large
data set (containing anonymized data elements like cargo description and HS
codes) is accelerated. This would further enhance the wider usage of this technol-
ogy among customs administrations.
In the near future, it is anticipated that the use of “deep learning” methods,
where feature extraction, representation, and classification are learned simultane-
ously, will show great promise. These types of methods have shown to achieve
superior performance in visual tasks, including image categorization. It is perfect-
ly reasonable to believe that these methods can and will outperform humans at
visual inspections of X-ray images.

Tracking Devices
Tracking devices using a combination of “radio-frequency identification” (RFID)
and satellite navigation systems (for example, GPS) enable accurate identification
of geographical location. Satellite-enabled GPS is now much more accurate, pos-
sibly pinpointing to within 30 centimeters. The GPS tracking technology allows
customs to monitor transit cargo movement in real time and deter cargo diversion
as an integral part of the electronic cargo tracking system (ECTS).34 Use of GPS
devices has been incorporated as electronic locks or smart seals, which secure the
cargo container, as well as provide tracking and monitoring functionalities. In the
event of attempts to break the lock/seal or divert from the route, an alert is auto-
matically triggered to customs.
The use of an RFID device with antenna and associated reader facilitates near-
distance communication and data exchange with a more reasonable cost. The
identifiable distance can be up to 100 meters. RFID devices or tags attached to
cargo or pallets are very useful for inventory monitoring in customs bonded ware-
houses. Use of such RFID tags helps compile inventory logs automatically and

34
Examples of ECTS implementations include Benin, Kenya, Mozambique, Nepal, Thailand, Togo,
and Uganda.

©International Monetary Fund. Not for Redistribution

228 Customs Matters: Strengthening Customs Administration in a Changing World

prevent the theft of goods with high excise taxes, such as tobacco products. Also,
an RFID device can be attached to the temporary admission signboard or regional
transit signboard. By using this technology, verification of carnet and vehicle
registration can be done more accurately and quickly without visually reading the
signboard or scanning the bar codes.
There are two issues in the use of tracking devices, particularly transit tracking.
First is the cost involved both in terms of capital outlay as well as in operating
costs. Customs administrations often consider whether cargo tracking costs
should be covered by themselves or by the economic operators. In a sense, cargo
tracking (vehicle tracking) is a social infrastructure: the beneficiary should not be
limited to customs but also include cargo owners (whereabout of their cargoes),
truck owners (tracking of their vehicles and drivers), insurance companies (mon-
itoring driving behavior), and police (speed control).35 Good system governance,
similar to customs clearance ICT system governance including possible BTO-
PPP36 (see “Governance and Financing of Customs Clearance ICT Systems”),
would solve the issue of cost burden.
Second, transit movement may be through multiple companies if cargo track-
ing services are preferably on a regional basis. If it is only national, a cumbersome
switching from one company’s service and device to the other company’s ones
may be needed at the land border posts of two countries, which will cause delay
and a queue at the border.37

Robotic Process Automation

Robotic process automation (RPA) is a newer form of business process automation,
which leverages the ability of a machine or software to perform a preprogrammed
task repetitively but with much greater efficiency than humans. RPA evolved along
with AI/ML, such that a software robot or “bot” can be programmed to mimic
most human–computer interactions to carry out error-free tasks at high volume and
speed.38 RPA bots can log into applications; handle high-volume, repetitious tasks
that include queries, calculations, and maintenance of records and transactions; and
then log out. RPA can free up staff from doing menial repetitive work to be
deployed to other value-added work such as analysis, operational controls, post-
clearance audits, and stakeholders’ engagements.
What distinguishes RPA from traditional business process automation is the
ability to be aware of and adapt to changing circumstances, exceptions, and new

35
For example, car insurance bargains based on the GPS tracking record is very common in the US.
36
In West African countries, a single-window operating company monopolizes peripheral logistic
ICT infrastructure and services, including transit and X-ray scanning. There is a discussion that such
a monopoly may increase efficiency but also increase the country’s dependency on one company and
reduce contestability.
37
ECTS regional approach attempts are observed in the East African Community.
38
To date, there are three broad categories of bots in place: probots (simple, repeatable rules to process
data); knowbots (bots that search the internet to gather and store user-specified information); and
chatbots (virtual agents who can respond to customer queries in real time).

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 229

situations. Once RPA software has been trained to capture and interpret the
actions of specific processes, it can then manipulate data, trigger responses, initi-
ate new actions, and communicate with other systems autonomously.
The biggest drawback of RPA is that it cannot make decisions on its own. For
example, it cannot decide what is correct; that intelligence needs to come from a
human or an AI. Another constraint is its limited ability to deal with dynamic or
unexpected changes. RPA works best in steady environments, where the business
processes do not change, and interfaces and data formats remain static. Because
of this, RPA is best exploited within a narrow set of customs operations, such as
the following:
• Enabling better customer client service (for example, telephone help desk,
complaints, corruption telephone hotline);
• Performing rapid and accurate data entry (for example, Optical Code
Reader [OCR] bot reading commercial invoices which have multiple diverse
templates);
• Ensuring business processes comply with regulations and standards (for
example, declared value checked against the value on the commercial
invoice, detecting major errors, and checking that necessary supporting
documents are all submitted);
• Allowing processes to be completed more rapidly (for example, producing
regular reports);
• Providing improved efficiency by digitizing and auditing process data (for
example, mining useful data from the accounting books and records)
With the emerging development of cognitive robotic process automation
(CRPA) software bots, RPA platforms can automate perceptual and judgment-
based tasks through the integration of multiple cognitive capabilities, including
natural language processing, ML, and speech recognition. The integration of
cognitive technologies is extending RPA to new areas and can help customs
administrations to become more efficient and agile in their digital transformation
journey. While promising, CRPA is still in its early days and the relationship
between RPA and AI is still not fully mature.

Cloud Computing
Cloud computing is the on-demand availability of computer system resources,
especially data storage and computing power, without direct active management
by the user. Cloud computing has effectively solved the financial and infrastruc-
tural problems associated with operating and maintaining software applications,
as it eases the total cost of ownership previously required. Advantages of using
cloud computing services (such as software as a service [SaaS], platform as a ser-
vice [PaaS], and infrastructure as a service [IaaS]) go beyond costs. The time to
develop specific software applications that often take months can be drastically
reduced in a cloud computing environment, and the development tools and
environment are centralized in the cloud.

©International Monetary Fund. Not for Redistribution

230 Customs Matters: Strengthening Customs Administration in a Changing World

Another benefit is the improved efficiency of IT resources via cloud virtualiza-

tion. The services approach/pay-per-use model of cloud computing services
affords clients greater flexibility based on their budget and need. Also, cloud
computing services allow access to systems and application via multiple devices.
One of the chief concerns in customs’ use of cloud computing is the legal
framework linked to sovereignty, security, and privacy. Customs administrations
are custodians of sensitive trade and citizen data “
Cloud computing is
under the national legal framework and keeping
the public trust in its security, privacy and confi- promising, but the legal
dentiality is paramount. If there is any data loss, framework has not caught
theft or manipulation in the cloud infrastructure up with the technology
located in a foreign country, there are concerns as evolution.”
to how customs can enforce cross-border control
and seek legal redress. The legal framework has not caught up with the technology
evolution and its use. Work needs to be done to sufficiently protect the govern-
ment’s ability to enforce their laws over foreign cloud service providers and
transgressors.
There have been various efforts to address these concerns, albeit partially.39
Some governments have stipulated that any organization wanting to utilize cloud
computing either must use cloud services that have data centers located within
the country or must keep local copies of all records.40 More governments have
found that adopting private and hybrid clouds helps alleviate some of these con-
straints, such as government private cloud facilities. At the same time, the
COVID-19 pandemic has amplified the usefulness of cloud computing technol-
ogy for the public sector.
Data privacy concerns, especially in the light of more stringent GDPR/PDPA,
present another potential constraint. The legal definition of “personal data” can
be much broader in some countries and jurisdictions, and therefore hosting such
data in a foreign country server is problematic. This situation surfaced in the case
of advance passenger information data when one economic bloc refused to share
the passenger’s name record with the other foreign authorities because this eco-
nomic bloc considers the foreign private data protection to be inferior.41

Attempt to reduce the risk by limiting the client(s): “private cloud” is the only client while “com-
39

munity cloud” is designated parties, for example, registered traders and customs.
40
As in the case of New Zealand.
41
EU refuses to exchange PNR (passenger’s data of the air ticket purchase) with other countries while
such exchange is recommended by the WCO and UN bodies. Several EU members authorities request
PNR from the foreign countries while they do not allow parties to submit the data outside the EU.
EU’s law covers all the data server located in the EU territory, including those for cross-border cloud
computing.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 231

Blockchain
Blockchain (BC), popularized by cryptocurrency, has been hailed as a technology
with significant potential for disruptive innovations in international trade. BC
enables many parties to collectively work on transactions and share information
securely as any log records of modification/processing of information are easily
verifiable by comparing the log information of all parties. BC-based technology
is best used for a transaction with many uses through distributed ledger technol-
ogies (DLT), which allows customs, other government agencies, and the trading
community to share data over a distributed ledger secured through cryptography.
All parties keep the same ledger of records and activities, and any change to the
ledger is automatically updated in the ledger of all parties. By doing so, the
authenticity and trust of information is secured. Any attempts of forgery are easily
detected. This also eliminates a single point of failure and inherently protects
sensitive data.
BC can be applied to any authenticated documentation process and induce a
significant impact not only on the regulatory process but also on trade financing
(see Chapter 2). The parties involved will benefit from secure and trusted data
exchange that is immutable, auditable, and tamper-proof. Several customs admin-
istrations have joined in BC pilots or have initiated their own projects:42 some
explore a BC-enabled cross-border platform in which customs takes part for the
exchange of e-certificates of origin or AEO certificates,43 while others examine
how trade data, such as declaration information, can be exchanged securely
using DLT.
One likely concern in BC, similar to third- “Blockchain secures the
party assurance and e-signature, is that while BC information’s authenticity,
secures the information’s authenticity, it does not
but it does not guarantee
guarantee that information is correct.44 This can
happen, for example, when both exporter and that the information is
importer connive together to circumvent customs correct.”
and tax authorities. It is not rare that authentic
certificates of origin were delivered by the exporting country’s chamber of com-
merce based on forged information—the same can happen in BC. Another con-
straint of BC is that, theoretically, the information can still be forged, and the

42
Examples are avocado shipments from Kenya to Netherlands (led by TradeLens [IBM/Maersk])
and trade financing (seven Indian commercial banks). Asia-Pacific Economic Cooperation (APEC)
also reports some pilots.
43
For example, Inter-American Development Bank (IADB) supported international exchange of AEO
certificates through CADENA project.
44
For example, some customs administrations complain that a certain country’s chamber of com-
merce’s certificates of origin are not reliable and contain many errors. Such inaccurate information
can be encrypted by BC and treated as the authentic information. This problem was reported when
e-certificate of origin backed up by e-signature was discussed. (Because of this problem, this project
did not continue.)

©International Monetary Fund. Not for Redistribution

232 Customs Matters: Strengthening Customs Administration in a Changing World

fraudulent information is maintained in the block if the majority of participating

parties are colluding together.
BC is set to revolutionize international trade in the years to come. Going
forward, many issues need to be discussed to resolve the challenges in bringing
BC technology into widespread practice in customs administrations. These issues
will need to be reviewed in light of the many ongoing pilot programs which are
all at the “proof of concept” stage.

Augmented Reality and Virtual Reality

Augmented reality (AR) is an “interactive experience” of a real-world environ-
ment which is enhanced by computer-generated perceptual sensory information—
for example visual, auditory, haptic, somatosensory, and/or olfactory. AR com-
prises data, graphics, audio, and other sensory interaction to form computer-
generated images that are superimposed on a user’s view of the real world, thus
providing a composite view. Virtual reality (VR), on the other hand, is a “simu-
lated experience” that places the user in a created, virtual world that can be similar
to or completely different from the real world.
AR and VR are edging their way into key areas of the public sector with the
potential to transform the use of data, increase staff performance, and improve
the efficiency of public services. Only recently, the core AR software and, most
importantly, the devices that will deliver the AR experiences have begun to
mature and find practical usage. These include handhelds and mobile devices,
primarily smartphones and tablets, and built-for-purpose mobile workforce
devices; head-up displays (HUDs) for windshields, screens, and visors; head-
mounted displays (HMDs); glasses, goggles, visors, and helmets; contact lenses;
virtual retina displays; and spatial displays.
Some possible applications for AR/VR in the customs environment include
the following:
• Remote inspection: Physical cargo inspection is usually conducted by customs
in the presence of the trader for better transparency and accountability. AR/
VR would enable customs remote inspection via the trader using AR devic-
es. Similarly, joint inspection at border posts can be done using AR, con-
trolled remotely by experienced inspectors from different agencies, or
located elsewhere.
• Interactive with data: Using AR/VR to access and visualize data (including
images and videos) in real time during the inspection or audit will save time
for customs as well as the public user.
• Simulation training: Training in mock environments (for example, imita-
tions of an airport customs counter and a ship structure for search) has been
conducted in several countries.45 This can be replaced with AR/VR, which

45
For example, airport counter in Uzbek customs, ship structure in Japan customs.

©International Monetary Fund. Not for Redistribution

 Chapter 7 Customs Administration and Digitalization 233

can create realistic and immersive experiential situations in a controlled

simulated environment to support training.46

SUMMARY
Customs administrations can improve their performance by fully exploiting the
potential of existing and new ICT systems to support not only declaration pro-
cessing but also internal operations and management decision-making. In doing
so, the leadership of customs administrations should be aware that ICT are
enablers, so it is imperative to address ICT plans in a holistic manner that sup-
ports the overarching strategic plan, as well as to leverage the vast store of data
and information collected by customs. Thus, data analytics capacity needs to be
further expanded to better design and parametrize the entire customs operations.
This should be in tandem with protecting privacy and preventing data breaches
so as to maintain trust in the customs administration.
The same issues apply to disruptive technologies, such as AI and scanned
image analytics. These offer significant opportunities to improve customs’ perfor-
mance if, and only if, the benefits and outputs from these technologies and the
use of the technologies themselves are clearly defined, agreed, and monitored. If
not, the investments produce limited outcomes and become an exercise of acquir-
ing very expensive gadgets that are not useful.
Hence, senior management of customs administrations play a critical role to
drive the digital transformation of their complex organizations. Senior manage-
ment needs to own and organize the proper structures, put in place the necessary
supervisory mechanism to ensure that ICT and digitalization efforts are aligned
with strategic directions, provide the requisite budget and legal support, assign
the right persons responsibility for this work, and ultimately be accountable for
the outcomes attained.

46
It has been reported that Dutch customs has incorporated virtual reality as a tool for training its
officers.

©International Monetary Fund. Not for Redistribution

234 Customs Matters: Strengthening Customs Administration in a Changing World

REFERENCES
Beckett, S. 2015. “Robo-Journalism: How a Computer Describes a Sports Match.” BBC Click.
https://www.bbc.com/news/technology-34204052.
Christensen, C. M., et al. 2016. “Disruptive Innovation: Intellectual History and Future Paths.”
Working Paper 17-057, Harvard Business School.
de Roux, D., et al. (2018). “Tax Fraud Detection for Under-Reporting Declarations Using an
Unsupervised Machine Learning Approach.” KDD, London. August 2018.
GATT. 1987. “United States Customs User Fee – Report by the Panel.” L/6264 (November 25,
1987), pp42-43.
Giordani,  A.  2018 “Artificial Intelligence in Customs Risk Management for e-Commerce.”
Delft University of Technology.
Hammer,  H.  1990. “Reengineering Work: Don’t Automate, Obliterate.” Harvard Business
Review ( July-August 1990) pp104-112.
Laney,  D., and  L.  Kart. 2012. “Emerging Role of the Data Scientist and the Art of Data
Science.” Report G00227058. Stamford, CT: Gartner, Inc.
Rogers,  T.  W., et  al. 2016. “Automated X-Ray Image Analysis for Cargo Security: Critical
Review and Future Promise.” Journal of X-Ray Science and Technology (August).
UN/CEFACT. 2020. “Presentation on ‘Machine Learning Approaches for Fraud Analytics in
Customs,’ 35th UN/CEFACT Forum Webinar Advancements in AI toward Facilitating
Cross Border Paperless Trade” (October 12, 2020).
WCO. 2005. “WCO Resolution on the Framework of Standards to Secure and Facilitate Global
Trade” (June).
WCO. 2012. “Customs Cooperation Council Recommendation on the Dematerialization of
supporting documents,” http://www.wcoomd.org/-/media/wco/public/fr/pdf/topics/wto-atf
/dev/recommendation-2012-on-dematerialization-of-supporting-documents.pdf?la=fr).
WCO. 2016. “Summary Report: [213th/214th Sessions of the Permanent Technical Committee
(11-14 October, 2016), Including the Joint Meeting of the Permanent Technical Committee
and the WCO Working Group on the WTO Trade Facilitation Agreement (11 October,
2016)].”
WCO. 2018a. “IT Guide for Executives” (June 2018). http://www.wcoomd.org/-/media/wco
/public/global/pdf/topics/facilitation/instruments- and- tools/tools/it-guide-for-executives
/it-guide-executives.pdf?db=web.
WCO.  2018b. “Building technology-driven organizations: China Customs shares its experi-
ence.” WCO News #87 (October 2018).
WCO.  2020. “WCO Annual report 2019–2020” (June  2020). http://www.wcoomd.org
/-/media/wco/public/global/pdf/media/annual-reports/annual-report-2019_2020.pdf.

©International Monetary Fund. Not for Redistribution

Appendixes

APPENDIX A EXAMPLES OF CUSTOMS

ADMINISTRATION KEY PERFORMANCE INDICATORS
Measuring performance is essential to determine the effectiveness of strategies and
operations, identify shortfalls, and adopt corrective solutions. Performance is
measured through key performance indicators (KPIs), which should be associated
with measurable activities for which data from a defined and credible source are
available. As a rule, the KPIs originate from strategic objectives that clearly pre-
scribe targets to be achieved over a certain period.
Commensurate with the administration’s capacities, the approach to perfor-
mance measurement can be incremental, starting with an introduction of the
basic KPIs, which will help management to focus initially on the assessment of
customs’ fundamental responsibilities and the ones that are most critical to orga-
nizational success. Later, more sophisticated KPIs can be introduced to measure
specific functions, processes, policies, and outcomes.1 There is no one-solution-
fits-all for the KPIs as different customs administrations have different priorities;
some are more law enforcement-oriented, others are more revenue-collection
oriented, and others are more focused on trade facilitation.
On the other hand, developing a dashboard for easy monitoring on a daily
basis, for both corporate and operational KPIs, is always recommended.
The following KPI examples link milestones and indicators as both are
important to ensure successful outcomes. In fact, achievement of the milestones
often is a prerequisite to moving forward with the steps in the administration’s
strategies. The milestones and indicators shown here are frequently used in cus-
toms administrations mainly in relation to core processing. The list is not
exhaustive.

Revenue Collection
Milestones
• The baseline performance information to support the effectiveness of collec-
tion monitoring is developed.
• An electronic payment system of customs duties, taxes, fees, or charges
imposed is implemented as the only payment method.

1
As part of its enlargement policy, the European Union has adopted a set of standards called Customs
Blueprints as a practical guideline based on EU best practice for candidate customs administrations to
measure their performance toward achieving EU standards. The blueprints provide goals, objectives,
and KPIs for 19 functionalities in customs plus four standards about excise duties. https://op.europa
.eu/en/publication-detail/-/publication/ad5f6272-7687-11e5-86db-01aa75ed71a1.

235

©International Monetary Fund. Not for Redistribution

236 Customs Matters: Strengthening Customs Administration in a Changing World

Indicators
• Rate of revenue target achievement
• Number of activities for which the electronic payment system is available
• Number of electronic payment transactions made during customs clearance
• Variation (increase or decrease) of customs collection over time as percent-
age of GDP by type of tax (customs duties, VAT, excise duties, and so on)
• Proportion of customs collection of total revenue collected (in monetary
value and as a percentage of GDP)
• Variation (increase or decrease) of the imports’ CIF value for home con-
sumption relative to total customs collection
• Level of customs collection relative to the variation (growth or reduction) of
international trade
• Proportion of customs collection over time by type of procedures (goods
clearance, PCA, arrears collection, litigation, and so on)
• Amount of revenue recovered and related penalties collected by area because
of customs intervention (valuation liftings, origin correction, tariff classifi-
cation, suspensive regimes misuse, exemptions, unreported goods in ports,
smuggled goods)
• Proportion of import exemptions’ value relative to customs collection

Customs Clearance
Milestones
• Customs laws, regulations, and guidelines are simplified and easily
accessible.
• The customs administration monitors ongoing release times of goods apply-
ing a solid and systematic methodology.
• A paperless customs clearance process is available in all customs offices.
• An electronic single-window system is implemented to facilitate non-tariff
permits.
• Customs–trade–other government agencies’ coordination committee is in
place and meets regularly to improve border processes.
• An Authorized Economic Operator (AEO) or a trusted trader program is in
place.
• Stakeholder surveys are undertaken to measure client satisfaction.

©International Monetary Fund. Not for Redistribution

 Appendixes 237

Indicators
• Number of customs procedures publicly available and easily accessible on
the customs website
• Number of customs advance rulings issued per type/coverage in percentage
of all declarations
• Percentage of cargo released based on pre-arrival information/advanced
electronic information
• Number of hard copies needed to import or export goods
• Release time in hours for imports that do not undergo physical inspection
(by each mode of transport)
• Release time in hours for exports that do not undergo physical inspection
(by each mode of transport)
• Release time in hours for imports that do undergo physical inspection (by
each mode of transport)
• Release time in hours for exports that do undergo physical inspection (by
each mode of transport)
• Number of regulatory agencies that are fully participating in the single
window
• Number of non-tariff authorizations approved through the single window
system
• Number of private-sector and other government agencies that participate in
a coordinated border management committee
• Number of improved customs procedures developed in consultation with
traders
• Total value of cross-border imports executed by AEO- or TTP-accredited
traders
• Total value of cross-border exports executed by AEO-accredited traders
• Improvement in the traders’ perception of cross-border facilitation

Risk Management and Compliance

Milestones
• A compliance improvement program based on risk management has been
developed.
• A systematic and transparent methodology to assess and improve selectivity
criteria is in place.
• Feedback mechanisms are available upon completion of an examination,
ensuring that data can be exploited and analyzed in a timely and appropriate
manner.

©International Monetary Fund. Not for Redistribution

238 Customs Matters: Strengthening Customs Administration in a Changing World

• A system is in place for the monitoring and verification of exemptions,

concessions, and duty waivers, including for enforcement action and loss
recovery.

Indicators
• A Risk Management Committee, with clearly defined roles and functions
has been established.
• A matrix identifying and prioritizing the main risks, including a plan with
specific actions for their mitigation is in place.
• A clear methodology for the categorization and risk assessment of the entire
population of traders is in place.
• Trends in percentage of import declarations processed through each selectiv-
ity channel
• Offense (hit) rate on import declarations: Physical and documentary
inspection
• Offense (hit) rate on import declarations: Documentary inspection
• Offense (hit) rate on import declarations: Supported by nonintrusive
inspection (NII)
• Offense (hit) rate on export declarations: Physical and documentary
inspection
• Offense (hit) rate on export declarations: Documentary inspection
• Offense (hit) rate on export declarations: Supported by NII
• Proportion of examinations that result in seizures
• Proportion of the total offenses detected by type of irregularity (number of
cases and amount of duty and tax reassessed, if applicable): Misclassification,
undervaluation, origin, undeclared goods, noncompliance with non-tariff
regulations, and so on
• Assertiveness Rate Indicator: Increase in the percentage of positive targeting
(hits/shipments inspected) divided by the reduction in the number of ship-
ments inspected over time (shipments inspected/total shipments)
• Number of exemptions, concessions, and duty waivers subject to verifica-
tion and audit
• Ratio of the number of detected irregularities during PCAs divided by the
number of PCAs
• Ratio of the number of PCA audits conducted on AEO applicants divided
by the number of AEO applications
• Number of audits of bonded warehouses, duty-free shops and SEZ opera-
tors (if applicable), number of detected irregularities, and amount of recov-
ered revenues including penalties and fines

©International Monetary Fund. Not for Redistribution

 Appendixes 239

Enforcement
Milestone
• An enforcement strategy is in place.

Indicators
• Rate of violations detected by contraband detection technology (for exam-
ple, x-ray, endoscopes)
• Number, value, and type of prohibited goods seized
• Number, value, and type of undeclared cash, banking negotiable instru-
ments, and gems/precious metals seized
• Rate of criminal investigations conducted resulting in charges raised
• Rate of successful court prosecutions in terms of additional revenue collect-
ed and jail sentences
• Number of enforcement operations where special investigative techniques
are used
• Number of suspended clearances because of infringement of intellectual
property rights
• Number of violations detected by intelligence-led controls
• Number of MOUs concluded with OGA and private sector
• Number of Customs Mutual Assistance Agreements concluded

Human Resource Management

Milestones
• Competency-based recruitment and human resource management is
implemented.
• Wages and other benefits to all staff are competitive and equitable.
• Equal career opportunities and paths to all staff (both women and men) are
provided.
• Policy, systems, and processes  are adopted for leave and flexible work
arrangements.
• Equitable health insurance is available to all employees that includes the
particular needs of women.
• Policies to prevent and address incidents of workplace harassment and vio-
lence are adopted.

©International Monetary Fund. Not for Redistribution

240 Customs Matters: Strengthening Customs Administration in a Changing World

Indicators
• Percentage of job descriptions that include competency profiles.
• Percentage of job descriptions that are reviewed annually to ensure that the
required competencies and qualifications are aligned to the organization’s
needs and gender equality.
• Pay levels (including pay gaps) and attrition rates for both men and women
• Proportion of women in each function or business area and at each level of
management
• Ratio of women promoted to those eligible for promotion
• Percentage of staff using flexible work arrangements
• Specific mentoring and coaching programs are available for women and
other categories of staff as needed.
• Managers and staff are trained on how to effectively encourage, report, and
address workplace harassment including sexual harassment cases.
• Basic and specialized training programs adapted to organizational needs are
made available to all staff and are identified as prerequisite to career
advancement.
• Private health insurance arrangements are available for staff enrollment in
complement of universal/compulsory insurance schemes.
• Ratio of managers and staff trained on workplace harassment prevention
and management, including sexual harassment.
• Ratio of managers and staff who obtained a promotion following a formal
review, appeal or grievance.

Integrity
Milestones
• Integrity action plan is in place.
• Internal controls cover all key functions.
• Processes and mechanisms to ensure staff integrity are instituted.
• Public perception of integrity is improved.

Indicators
• Proportion of key customs functions and processes that have a risk map
• Number of measures implemented to reduce officers’ discretion
• Variation in number of officer conduct complaints
• Proportion of staff that submit an assets declaration in a timely manner
• Variation of the perception of corruption by the trade community

©International Monetary Fund. Not for Redistribution

 Appendixes 241

APPENDIX B ISSUES IN COOPERATION AND

INTEGRATION OF CUSTOMS AND TAX
ADMINISTRATIONS
While integrating the tax and customs administration into a single agency can
bring significant benefits, this must be analyzed in detail in terms of expected
results and potential risks. Having a single management team and merging sup-
port functions are not enough by themselves to modernize tax and customs
administrations; the process must be accompanied by a comprehensive plan to
improve the effectiveness of their core processes.
Crandall and Kidd (2010) concluded that the integration of tax and customs
administrations in a semi-autonomous “revenue authority” (RA) would not by
itself increase revenue. Partly because of the lack of a performance management
framework and operational data, it has often been difficult to demonstrate the
benefits of the RAs for revenue mobilization or at least their relative share in
revenue increase.
Merging or separating the tax and customs administrations is a decision that
governments must make in each case, considering their own context. In some
countries that have chosen to implement structural changes of this nature, the
Fiscal Affairs Department has provided technical assistance and advice to author-
ities to help them mitigate risks during the transition period. This technical
assistance is focused on ensuring that the governance and management model of
the new agency (or agencies) and the new organizational structure are clear, that
the core business functions are well defined in accordance with good international
practices, and that there are suitable institutional mechanisms for cooperation
between the agencies in charge of tax and customs services and control.
Once a decision has been made to bring the tax and customs administration
“under one roof,” it is important to retain the function-based approach of HQ
structures and the highest level of expertise in each technical area. This can be
achieved by integrating common functions such as research, design, planning,
and monitoring, making sure that existing tax and customs specialization within
each structure is preserved. Internal audit could also be integrated into one unit,
provided specialists from each original administration remain primarily involved
in their respective core areas; the same approach would work for an integrated
legal department.
Other key support functions (human resources, budget, and communications)
can be integrated. However, a number of technical issues, including the develop-
ment of policies that are generally specific to tax or customs, require specialists
from both sides. The best example is probably IT development and maintenance,
since tax and customs transactions cycles are markedly different and require the
use of two distinct systems for their core functions. Another example is the defi-
nition of competencies for specialized tax and customs staff; these will differ
because many core functions are unique to either tax or customs.

©International Monetary Fund. Not for Redistribution

242 Customs Matters: Strengthening Customs Administration in a Changing World

Operations that are part of the regular tax or customs processes should be kept
separate and left under the oversight of the heads of tax or customs, respectively.
For tax, this includes taxpayer services, assistance and education, audits, appeals,
and collection enforcement. For customs, this includes service and assistance to
stakeholders, cargo reporting, clearance of goods, post-clearance audit, and part-
nership programs with stakeholders such as the AEO programs.
Intelligence functions for both areas of business are typically operational and
part of the respective processes; hence, they are separated but require close coor-
dination and systematic exchange of information (or access to a common data-
base, including the taxpayer profile). Criminal investigations should preferably be
assigned to a single integrated unit, making sure that it is composed of tax and
customs specialists.
Some specialized technical functions like debt collection (involving seizure
and/or sale of immovable or third-party liabilities) should be positioned in either
customs or tax where the expertise and a comparative advantage to carry out such
functions exist.
Regarding risk management, if a decision to integrate is made, it would be
necessary to develop a common institutional policy aiming at standardizing how
risks will be assessed and managed from a strategic perspective, defining how to
optimize the usage of data from both agencies, and identifying common points
that could help strengthen the core processes of both. However, it is essential to
ensure that both agencies have enough room to define their own model to address
their own risks, taking into account the particularities of each business, particu-
larly moments and time frames for interventions.
One risk is that the merger could lead to an excessive or even exclusive focus
on revenue collection, neglecting the important non-tax functions of customs, as
these might not be considered a strategic priority for the new agency. This is
especially true for border protection and security as well as for trade integrity,
consumer protection, trade facilitation, implementation of trade policy measures,
and regional integration. A merged revenue authority must also have the mandate
and, most importantly, be given the resources to address these non-revenue areas
effectively. This approach should be reflected in the organization chart, strategic
and operational objectives, resource allocation, and performance indicators.
Finally, regarding the institutional name of a merged administration, it would
always be more convenient that it reflect both the tax and customs functions of
the agency for taxpayers and operators to understand that they are dealing with
the government entity mandated to enforce both the tax and customs laws of
the land.

©International Monetary Fund. Not for Redistribution

 Appendixes 243

APPENDIX C ORGANIZATION STRUCTURE OF

A CUSTOMS ADMINISTRATION
The organization structure in any particular country will need to address its
national reality, the needs of its government, and its service model to citizens; as
such, varied models are to be expected. Two simplified examples are shown for
how a customs administration may be organized, one more typical for medium/
large organizations and one for smaller administrations.

Example of How a Customs Administration May Be Organized: Small

Administration
Head of
Customs

Internal Affairs

Customs Policy Corporate

Operations Enforcement Compliance
and Procedures Administration

Classification, Risk
Field liaison and Mobile smuggling management, Finance
valuation, and origin coordination office teams selectivity criteria,
and targeting
Human resources
Trader programs Regional offices Intelligence
(to which local Post-clearance audit
officers report) Information
Appeals technology
Investigations
Facilities and
Customs regimes
procurement
exemptions,
suspensions,
duty relief
programs

Source: Authors.

©International Monetary Fund. Not for Redistribution

244 Customs Matters: Strengthening Customs Administration in a Changing World

Example of How a Customs Administration May Be Organized: Medium to

Large Administrations
Head of
Customs

Legal Affairs
Internal Audit and
Evaluation Internal Affairs

Customs Policy Corporate

Strategic Policy Operations Enforcement Compliance Administration IT HR
and Procedures

Planning and Classification, Field liaison and Enforcement Risk IT operations Staffing and
Finance
reporting valuation, and origin coordination policy management classification
office
International Trader programs Security IT security
Enforcement Targeting
affairs Regional offices Labor
AEO, TTPs operations
(to which local IT relations
Facilities and
Communications officers report) Selectivity criteria development
Appeals Intelligence procurement
Performance
National
Stakeholder Post-clearance management
Customs regimes targeting center Investigations
management audit
exemptions,
suspensions, Enforcement Training and
duty relief partner development
programs coordination

Source: Authors.
Note: AEO = authorized economic operator; IT = information technology; TTP = trusted trader program.

©International Monetary Fund. Not for Redistribution

 Appendixes 245

APPENDIX D MEASURES FOR OPTIMAL DATA USAGE

Data Validation and verification
Automatic data validation allows determining if certain information falls within
the acceptable range of values for a given field, while data verification consists of
ensuring its accuracy and consistency. Through validations, it is possible to cross-
check data against existing values in a database. Some examples include verifying
(1) taxpayer number as registered in the corresponding agency; (2) container
number according to BIC code;2 (3) registered address by the corresponding
agency and/or georeferencing; (4) license number as registered in the correspond-
ing agency; (5) number of unloaded containers versus containers manifested; (6)
in transloading, reported unloaded weight cargo versus uploaded weight cargo;
(7) commercial quantities declared versus inventoried cargo; (8) a single container
linked to various simultaneous declarations; (9) manifest that actually arrived
versus declared manifests; and (10) incoming cargo versus cargo associated with
each customs transaction.

Metrics
Metrics are a set of measures used for statistical analysis, comprising quantitative
and qualitative variables. Examples of quantitative variables include (1) volume of
transactions; (2) total value of transactions; (3) taxes paid relative to declared
customs value; (4) customs value under trade agreements relative to total value,
for each economic operator; and (5) total number of trade units. With qualitative
variables, it’s useful to focus on binary variables, such as (1) Is it a first-time trans-
action? (2) Is it the first time this good is imported from the declared origin? (3)
Is the trader an individual? (4) Is it the first transaction for this good on this mode
of transportation? (5) Is it a high-risk operator for internal taxes?

Indicators
Indicators constitute complex statistical summaries because their construction
requires the development of catalogs and the definition of thresholds. For exam-
ple, (1) economic operator that deals with high-risk customs brokers; (2) operator
that imports from high-risk origins; (3) operator that deals with high-risk ship-
pers or carriers; (4) operator importing sensitive cargo; (5) operator declaring a
majority of its cargo as residual;3 (6) cargo with record of heightened selectivity
controls; (7) cargo commercialized by high-risk suppliers; (8) cargo subject to
special regulations; and (9) noticeable inter-annual variations in the value of an
operator’s imports/exports. For each case, it is necessary to previously define a
catalog to determine what is considered risky, sensitive, or high.

2
A container’s code is made up of 11 alphanumeric digits. The first three letters correspond to the
owner, usually followed by the letter U, followed by a six-digit serial number and a verification digit.
3
“Residual” cargo is a category used to classify cargo that does not fall under any specific category.

©International Monetary Fund. Not for Redistribution

246 Customs Matters: Strengthening Customs Administration in a Changing World

Indices
An index is defined as a weighted arithmetic expression, with the goal of provid-
ing a summarized measurement. Some of the various indices that can be built are
(1) an operator’s global risk index, (2) a unit price index,4 and (3) an index of
container cargo volume.5

Models
Unlike indices, models introduce linear, logistic, or probabilistic regressions
through the use of analytical software. Among the most common models are
those that are (1) predictive, (2) tree-based, (3) clustering, (4) networking, and
(5) neural networks.

Artificial Intelligence
Artificial intelligence can introduce image and text recognition through the use
of sophisticated algorithms. A few examples applied to customs include the use of
data derived from (1) document-reading—invoices, certificates, and others; (2)
scanned images; (3) facial recognition of passengers; (4) vehicle tag recognition;
and (5) e-signatures.

4
The aim of the unit price index is the distribution of unit prices of each product and recognizing
which operators or transactions lie outside the confidence interval.
5
The index of container cargo volume is oriented transactions involving homogenous products or
a single product per container to identify cases where its weight per container exceeds the defined
confidence intervals.

©International Monetary Fund. Not for Redistribution

 Appendixes 247

APPENDIX E MAIN COMPONENTS OF ECONOMIC

OPERATOR COMPLIANCE HISTORY

APPENDIX TABLE E.1

General Profile
Legal name Tax identification number (TIN)
Business name Contact person name and email
Date of registration
Fiscal address Telephone number
Industry sector Total employees
e-commerce
Line of business Wholesale Retail Manufacturing Storage Service Transportation
platform
Company’s legal representative
Type of taxpayer Natural person Legal person

Global Risk Index (GRI) Medium

APPENDIX TABLE E.2

Customs Data
Customs transactions overview
Year 1 Year 2 Year 3
Total Total Total
CIF/ Total taxes paid CIF/ Total taxes paid CIF/ Total taxes paid
FOB FOB FOB
Duties VAT Excise Others Duties VAT Excise Others Duties VAT Excise Others
Imports
Exports

APPENDIX TABLE E.3

HS Code Summary
Year 1
Tax paid
HS code Description Origin Units Unit measure Value CIF/FOB
Duties VAT Excise Others
Imports
Exports
Year 2
Tax paid
HS code Description Origin Units Unit measure Value CIF/FOB
Duties VAT Excise Others
Imports
Exports

©International Monetary Fund. Not for Redistribution

248 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX TABLE E.4

Selectivity Rates
Year 1 Year 2 Year 3
Imports Exports Imports Exports Imports Exports
No. No. No. No. No. No.
% % % % % %
Declarations Declarations Declarations Declarations Declarations Declarations
Physical
examination
Documentary
examination
Nonintrusive
examination
No
examination

APPENDIX TABLE E.5

Fiscal information
Income Tax VAT Excise Taxes
Tax returns Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Total income
Total tax deductions
Total income tax paid
VAT paid to customs (import
related)
Total VAT paid to suppliers
(goods and services)
Total VAT collected from
customers and other sources
Net VAT paid to the tax
administration
Total excise taxes paid to
customs (import related)
Net excise taxes paid to the tax
administration

APPENDIX TABLE E.6

Compliance Record
Year 1 Year 2 Year 3
Number Penalty Number of Penalty Number Penalty
Type of infraction of Cases Assessed Cases assessed of Cases Assessed
Misclassification
Undervaluation
Incorrect country of origin
Undeclared goods
Smuggling
Contravention or infringement of a
nontariff regulation, restriction, or quota
Other
Total

©International Monetary Fund. Not for Redistribution

 Appendixes 249

APPENDIX TABLE E.7

Value Analysis
Period: mm/dd/aaaa – mm/dd/aaaa
Country of Total Unit price
Supplier HS Code Units Average6 Variance7
origin value $ $

6
It is the HS code’s average unit price of goods traded by all operators with the same origin and
period.
7
It is a statistical measurement of the dispersion between numbers that belong to the same data set.
Low variance indicates that values do not spread widely.

©International Monetary Fund. Not for Redistribution

250 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX F ECONOMIC OPERATORS’

SEGMENTATION AND ASSESSMENT METHODOLOGY
Step 1. Segmentation by size. Economic operators must be segmented according
to their relative importance in transactional value (CIF/FOB) levels, resulting in
the following criteria: (1) small, (2) medium, and (3) large.8 Each category can be
obtained by distribution analysis via the thresholds’ definition or through fre-
quency levels. In the latter case, it will be necessary to calculate the median (M)
and standard deviation (SD) as well as knowing the participation percentages of
each economic operator within CIF/FOB in relation to the total to complete the
following matrix:

Segmentation by Size—Criteria
APPENDIX TABLE F.1
Frequency Calculation Details Size
Very low frequency % Participation <= (M – 0.75 SD) Small
Low frequency (M – 0.75 SD) < % participation <= (M – 0.25 SD) Small
Medium frequency (M – 0.25 SD) < % participation <= (M + 0.25 SD) Medium
High frequency (M + 0.25 SD) < % participation <= (M + 0.75 SD) Large
Very high frequency % participation > (M + 0.75 SD) Large

Step 2. Definition of metrics and indicators. Different summary measurements

for all economic operators are calculated, many of which have already been
defined in Appendix D: Measures for Optimal Data Usage. It is recommended to
conduct a distribution analysis of each indicator or metric for the total of eco-
nomic operators as well as identifying values’ evolution within the period under
study. Each value should be included in obtaining the following matrix—which
may be useful to identify possible inconsistencies.

8
It is worthy to note that segmentation by size may produce different risk profiles for customs than for
tax administration. Size inconsistencies between these organizations may introduce additional risks.

©International Monetary Fund. Not for Redistribution

 Appendixes 251

Examples—Metrics and Indicators Evolution

APPENDIX TABLE F.2
Economic Operator’s Name/Number Inter-Annual Evolution
Indicator/Metric Calculation Formula Year 1 Year 2 Year 3
Customs offenses-compliance # Declarations with customs
% % %
record ratio9 offenses / # Total declarations
Value of goods in offenses / Value of
Offenses value ratio % % %
total goods imported or exported
Value of sanctions applied / Value of
Sanctions value ratio % % %
total goods imported or exported
If date of the opening or registry
date is less than xx years—1
Age of the company ratio # # #
If date of the opening or registry
date is more than xx years—0
VAT-CIF revenue ratio10 Total VAT paid / Total CIF % % %
Duty–CIF revenue ratio11 Total duty paid / Total CIF % % %
CIF–agreements revenue sharing CIF with agreements / Total CIF
% % %
ratio
CIF–exemptions revenue sharing CIF with VAT exemption / Total CIF
% % %
ratio
Based on a list of high-risk countries
High-risk country of origin margin
of origin—CIF from high-risk origin % % %
ratio
country / Total CIF
Sensitive goods margin ratio CIF from sensitive goods / Total CIF % % %
CIF from residual tariff code / Total
Residual tariffs margin ratio % % %
CIF
Tax return non-filers Non-filing of domestic tax return # # #
Profitability ratio Gross income / Net income % % %
Business performance Net income / ROE % % %
Indicator Calculation formula
Net margin Net profit / Sales
Return on total costs Operating profit / total cost
Inconsistence VAT ratio Import VAT / Domestic VAT % % %
Exports—total income ratio Total exports / Total income % % %
Total exports declared at customs /
Exports—foreign sales % % %
Foreign sales declared in tax return
Source: Authors.
Note: ROE = ratio on equity.

9
The irregularity ratio measures the economic operator’s compliance level. To build it, the set of pen-
alties, customs duties and taxes repayments, contraventions, and administrative and judicial processes
generating a reassessment are considered. Its calculation should stem from the following formula:
J
Irregularity Ratio = ∑ 1 customs declarations with ajustment i/Total declarations i
Where: Customs Regimes: 1, 2…. J; Importer: i, i+1, ..., T
Note: When a customs declaration originates more than one irregularity, it should be computed as
double both in numerator and denominator. In addition, there are two alternate variants: (1) it is
possible to weight the kind of irregularity according to its relative importance. In this case, the formula
J
would be: Irregularity ratio = = ∑1 β * Declarations with ajustment i/Total declarations i, where β is
the relative importance while β1 + β2 + … + βn =1. (2) The indicator can be assessed by tax repayment
amounts; in this case, the formula becomes:
J
Irregularity Ratio = ∑1 CIF portion with tax repayment in i declarations/CIF total i
10
The VAT-CIF ratio needs to consider only goods subject to related tax. A default value needs to be
shown in tariff code exempted.
11
Idem.

©International Monetary Fund. Not for Redistribution

252 Customs Matters: Strengthening Customs Administration in a Changing World

Step 3. Conversion to binary variables. For each of the measures, distribution is

analyzed, and based on the expert judgment from customs, a threshold is deter-
mined for each indicator. Importers that go beyond such threshold will be valued
with a “1,” which is equivalent to considering them risky in the indicator. For the
rest, their value will be “0.”12

Step 4. Definition of weights/balance. Weights for each indicator and metric are
determined based on a sub-sample of custom operators with irregularities.
Following the previous step, the set of indicators is classified as “1” or “0,” when-
ever it reaches the threshold. Then adding up the subsequent binary variables will
identify which metrics and indicators are the most explanatory. The final weight
for each indicator will be determined by dividing the sum of the “1s” occurrences
for each indicator over the total sum of occurrences.

Step 5. Global Risk Index (GRI) calculation. For each operator, the global risk
index is composed by three elements: (1) weights assigned to each indicator and/
or metric (wi), (2) values obtained as an answer to each indicator or metric (Ri),
and (3) the form of the selected algorithm. Concerning the form of the algorithm,
customs will have to determine if the GRI chosen will follow a linear, exponential,
or any other behavior type that best describes the behavior of the data. In order
to facilitate understanding of the other two components, a linear type of GRI will
be used for the remainder of this example, irrespective of which, the reasoning
will be the same in case of choosing one of the alternates. Therefore, the calcula-
tion of the GRI formula would be:
n
GRI = ∑
  Wi Ri
i=1

Where:

Wi = Weight assigned to the indicator

Ri = Response obtained by the indicator
n = Total number of indicators

Step 6. Risk segmentation and assessment. Applying the complete formula for the
entirety of operators, that is, calculating the value of each measure with the cor-
responding balancing yields the GRI of all operators. The next step assumes
establishing the cut-off points that define low, medium, and high-risk levels. As
an example, in Appendix Figure F.1, they were set at 0.75 and 0.85; however,
these values will depend on GRI distribution. When size and GRI are exchanged
between customs and tax administration, risk profiling is enhanced and compre-
hensive control possible.

12
An additional analysis of missing values needs to be considered in order to determine their treatment
within the sample. This could bias the estimates of the risk index downwards for some operators.

©International Monetary Fund. Not for Redistribution

 Appendixes 253

Appendix Figure F.1. Risk Levels

LOW RISK MEDIUM RISK HIGH RISK

0 0.75 0.85 1

The matrix in Appendix Table F.1, once completed, would summarize all prior steps.

APPENDIX TABLE F.3

Operators’ Segmentation and Assessment

Operators No. of % of Total Value of % of Total Value
Size GRI Level Operators Operators Transactions ($) of Transaction
Large # % $ %
High # % $ %
Medium # % $ %
Low # % $ %
Medium # % $ %
High # % $ %
Medium # % $ %
Low # % $ %
Small # % $ %
High # % $ %
Medium # % $ %
Low # % $ %
Total # % $ %
Source: Authors.

©International Monetary Fund. Not for Redistribution

254 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX G SENSITIVE GOODS IDENTIFICATION

METHOD
Step 1. Identifying sensitive goods from matrix definitions. Matrix analysis helps
us to identify the most sensitive goods based on any combination of two selected
conditions. Within each matrix, tariff codes distribution will be presented, this is,
each cell contains the number of goods that satisfy the value chosen from each
condition.
For example, if we consider the matrix “Customs Duties versus VAT,” the
matrix may include many lines as different duties values are registered; and many
columns according to VAT rates are declared. Then it could be interesting to the
analyst to explore the cell that groups the HS codes that paid 0 percent of duties
and 0 percent of VAT. Other matrixes that can be used as reference are (1) cus-
toms duties versus specific tax; (2) control level—understood as the number of
physical inspections, documental inspections and goods released without con-
trol—versus detected infractions; (3) control level versus number of importers;13
and (4) certificates versus dual-use and strategic goods.14
APPENDIX TABLE G.1

Tariff Entries Distribution Matrix

Customs Duties versus VAT Matrix VAT
Customs Duties 0% (…) X%
0% # # #
(…) # # #
Y% # # #

Step 2. Analysis roadmap. Several criteria can be used to select the combination
of sensitive or risky goods, for example: (1) choosing tariffs codes that are exempt
from paying customs duties and VAT; (2) goods that in the last years have had
major value adjustments, misclassification, or other forms of irregularities; (3)
tariff codes that are more sensitive from their dual or strategic condition and have
not presented certificates; or (4) using a combination of these and other criteria.

Step 3. Goods hierarchy. Once the selection satisfies the analyst, behavior analysis
of each tariff code using the defined metrics and indicators can be started. Some
examples can be found on the “Measures for Optimal Data Usage” box in
Appendix D. This type of analysis would allow discovering, for example, if there
is a link between growth and larger trade volumes in tariff codes that pay lower
duties and taxes when compared to others which may be similar; this then under-
lines a potential risk of misclassification. Likewise, it will help analyze trends on

13
This will allow us to recognize which are the most concentrated markets and/or which are the
goods that tend to be traded by few importers, which can determine, among other things, collusion
practices.
14
Dual-use and strategic goods are those considered by the WCO through the Strategic Trade Control
Program.

©International Monetary Fund. Not for Redistribution

 Appendixes 255

the evolution of CIF values, tax revenue, and number of operators. Appendix
Table G.2 outlines how this is presented.
APPENDIX TABLE G.2

Selected Goods Hierarchy Assignment

CIF Rates Collection No. Importers
Sub-tariff Description
$ GAGR VAT Duty $ GAGR No. GAGR15
NNNN.NN1 (. . .) $ % % % $ % # %
NNNN.NN2 (. . .) $ % % % $ % # %

Additionally, Appendix Table G.2 can be complemented with an individualized

table per tariff code, revealing the behavior of metrics and indicators for each year
under study. This summary enables customs to identify relevant goods based on
the level and evolution of measures—for example, CIF, number of declarations,
and so on. This can be seen in Appendix Table G.3.
APPENDIX TABLE G.3
Summary for Tariff Code
NNNN.NN1 Year 1 Year 2 Year 3
CIF NNNN.NN1 / CIF Total % % %
CIF
CIF NNNN.NN1 $ $ $
Declarations NNNN.NN1 / Total Decl. % % %
Declarations
Declarations NNNN.NN1 # # #
Revenue NNNN.NN1 / Total Rec. % % %
Revenue collection
Revenue NNNN.NN1 $ $ $
Controls Control NNNN.NN1 / Total controls % % %
Importers Operators that concentrate 80% CIF # # #
Concentration—CIF Operators that concentrate 50% CIF # # #
value
Operators that concentrate 80% of # # #
Importers
total collection NNNN.NN1
Concentration—
Operators that concentrate 50% of # # #
Revenue
total collection NNNN.NN1

Step 4. Once the relevant range of goods is reached, the analyst’s next step is
determining the interrelation between operators and risk levels.

15
Geometric Average Growth Rate (GAGR): (present value / previous period value) 1/n – 1, where n is
the number of time intervals in the data set, for example, if the analysis would comprise transactions
from 2000 to 2015, then n would be 15.

©International Monetary Fund. Not for Redistribution

256 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX TABLE G.4

Sensitive Goods Linkage with High-Risk Operators
Sensitive Size
GRI Level No. of Importers TIN GRI
Tariff Code Segmentation
TIN 1 GRI
High
# TIN 2 GRI
Large TIN 4 GRI
Medium
# TIN 5 GRI
TIN 7 GRI
Low
# TIN 8 GRI
TIN 10 GRI
High
NNNN.NN1 # TIN 11 GRI
Medium TIN 13 GRI
Medium
# TIN 14 GRI
TIN 16 GRI
Low
# TIN 17 GRI
TIN 19 GRI
High
# TIN 20 GRI
Small TIN 22 GRI
Medium
# TIN 23 GRI
TIN 25 GRI
Low
# TIN 26 GRI

©International Monetary Fund. Not for Redistribution

 Appendixes 257

APPENDIX H BRANCH MEASURES TO

DECISION TREE MODEL
Each declaration will be analyzed per branch/node based on a pre-defined condi-
tion, and if it is met, it will continue toward the subsequent node until the end
of the tree, where an eventual control decision will become evident.
There are three decision branches: (1) sensitive operator identification, (2) analy-
sis of sensitive tariff codes, and (3) the analysis of suppliers and unit prices. In
branches 1 and 2, a set of indicators and metrics are defined. Some examples of
measures are included in Appendix Tables H.1 and H.2.
APPENDIX TABLE H.1
Operators Branch Measures
Name of the Indicator Syntax of the Indicator Definition
A.1. Customs offenses Declarations with customs offenses Identify the level of compliance for
compliance record ratio / # Total customs declarations each operator
A.2. GRI Recognize the operator’s level of
GRI i
risk according to GRI.
A.3. Age of the company Opening or registering date I ≥ N Identify habitual and casual
years – Non-new taxpayer operators.
Opening or registering date i < N
years – New taxpayer
A.4. Declared earnings Identify possible deviations
Sales reported in internal taxes / CIF
between purchases abroad and
Total
local sales
A.5. Declared taxes VAT on sales reported in internal Recognize if there are deviations in
taxes i / Sales reported in internal taxes paid based on sales in the
taxes i internal market.
A.6. (…)

APPENDIX TABLE H.2

Goods Branch Indicators
Name of the Indicator Syntax of the Indicator Definition
B.1. Offenses compliance Declarations with customs offenses Identify the level of compliance of
record ratio repayments / # Total declarations each tariff code.
B.2. Does it constitute a Residual tariff code according to Identify if the attributed generality
residual tariff code? chosen criteria16 warrants undervaluation.
B.3. Is a certificate or Mandatory certification or permit
permit required? Certification or permit is required. defines these products as higher
risk.
B.4. Was it imported for New good can explain access to
The good does not appear in
the first time during the new industries but might also
customs declarations prior to the
surveyed period? indicate substitution of national
surveyed period.
production.
B.5. Internal taxes paid Identify the relation tax/imported
Internal taxes paid / Total CIF
value.
B.6. (…)

16
An often-used criteria is to consider a PA residual if, when read from right to left, it counts n zeros,
and the second next number is “9.” An example is 6182.90.00.

©International Monetary Fund. Not for Redistribution

258 Customs Matters: Strengthening Customs Administration in a Changing World

With respect to the first dimension, the analyst must identify (c.1) if the goods
were sent by a supplier with customs offense record, within the same tariff code
or a different one; and/or (c.2) if any operator involved—importer or customs
broker—already has a prior history with the supplier. The second level of analysis
proposes to identify if (c.3) the unit price of goods falls outside the confidence
interval; (c.4) goods belong to a market with a high unit price dispersion; and
(c.5) the goods belong to a tariff codes group with higher rates of duties and tax
repayments. While the set of indicators and metrics in the branch A should be
oriented toward operators, the measures in the branch B are applied to goods.
Meanwhile, the branch C considers broadening the analysis in two ways: on the
one hand, a suppliers’ analysis and, on the other, a unit price study.
Appendix Figure H.1 graphically presents how the inductive decision process is
represented. Selecting one or more indicators per branch and when they become
activated or confirmed, the tree is completed, and the control decision should be
displayed.

Appendix Figure H.1. Decision Tree Model Graphic Representation: Model I

Activate indicator A.1?

Yes No

Activate indicator B.3?

No Yes

Activate indicator C.2?

Yes No

Control

Based on these branches, the proper decision tree model must be chosen. Since
the customs declaration is submitted, this decision process starts with the first
node. If at least one of the four models is activated, then it is possible to move to
the second node. The activated condition/s on the first and second nodes start to
build the I, II, III, or IV tree model. The most widely used decision tree models
are shown in Appendix Table H.3.

©International Monetary Fund. Not for Redistribution

 Appendixes 259

APPENDIX TABLE H.3

Indicator-Based Decision Tree Models
Tree Model First Node Second Node Third Node Fourth Node
I Operator with prior Goods with offenses record
irregularities Unit price with
II “X” indicator for the “Y” indicator for goods high deviation
Supplier with
operator activated activated from average
prior irregu-
III Several indicators Several indicators for goods value or outside
larities
for the operator activated confidence
activated intervals
IV High GRI level Identified as a sensitive good

©International Monetary Fund. Not for Redistribution

260 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX I CLUSTER ANALYSIS

Description
Historical information for a period of no less than 6 months must be considered,
and the percentage of offenses detected over the total import transaction must be
analyzed. The methodology can be applied to any customs regime. According to
the following steps, this iterative method can be displayed between steps 2 and 6:

Step 1. Importers selection. Through a list of importers, it will be possible to

recognize who are the operators with the greatest number of declarations with
adjustments and/or customs offenses. This analysis may suggest not considering
certain HS chapters that could bias the analysis and insert distortions in the levels
of offenses detected, that is, chapters 22 or 87.

ADJUSTMENTS AND OFFENSES OPERATORS FOB value Declarations

IMPORTER $ #
IMPORTER 1 $ #
IMPORTER 2 $ #
IMPORTER 3 $ #
IMPORTER 4 $ #
(…) $ #
IMPORTER 10 $ #

Step 2. Customs agents analysis. Only customs brokers linked with offenses need
to be considered under the selected importers. The first alternative that this meth-
odology proposes is starting with customs brokers with a higher number of
offenses and then identify importers connected with these cases.

FOB value Declarations

IMPORTER 1 $ #
CUSTOMS BROKER 1 $ #
CUSTOMS BROKER 2 $ #
CUSTOMS BROKER 4 $ #
IMPORTER 2 $ #
CUSTOMS BROKER 1 $ #
CUSTOMS BROKER 8 $ #
IMPORTER 3 $ #
CUSTOMS BROKER 6 $ #
CUSTOMS BROKER 7 $ #
(…) $ #
CUSTOMS BROKER 10 $ #

Step 3. Supplier–importer linkage. Even though the next step may choose differ-
ent courses of action, it is proposed to identify the main suppliers that participat-
ed in commercial transactions of the adjusted goods. It is possible that the same

©International Monetary Fund. Not for Redistribution

 Appendixes 261

supplier may be present in more than one selected importer, which are the cases
that continue to the next step. A second alternative proposed by the methodology
suggests starting with a noncompliant supplier and then identify connected
importers. Customs brokers will be incorporated in step 3.

SUPPLIER M Valor FOB Declarations

CUSTOMS BROKER 1
IMPORTER 1 $ #
IMPORTER 2 $ #

Step 4. Risk origin country connections. When an operator’s noncompliant net-

work is identified, it is possible that only some countries of origin are linked with
these offenses. The route may incorporate additional components as the mode of
transport and the customs entry point or local office. These conditions can be
added to the cluster if there is a strong correlation trend between them.

SUPPLIER M Origin country FOB Value Declarations

CUSTOMS BROKER 1
$ #
IMPORTER 1
A $ #
B $ #
$ #
B $ #
IMPORTER 2
C $ #
D $ #

Step 5. Goods analysis. In addition to identifying the HS codes with the greatest
participation in these fraudulent events, it may be relevant to complement it with
an analysis by (1) type of packaging, (2) technical details of the good, (3) storage
conditions, and (4) perishing and/or toxicity requirements.

SUPPLIER M HS CODE Origin country FOB Value Declarations

CUSTOMS BROKER 1
$ #

NNNN.NX $ #
IMPORTER 1 NNNN. NY $ #
B
NNNN.NZ $ #
NNNN.NR $ #
$ #
IMPORTER 2 NNNN.NX $ #
B
NNNN.NM $ #

©International Monetary Fund. Not for Redistribution

262 Customs Matters: Strengthening Customs Administration in a Changing World

Step 6. Cluster definition. When there is a high level of concentration in all or

some previous conditions, it is possible to recognize a risk cluster. In this way,
each variable—customs broker, supplier, country of origin, mode of transport,
customs office, and good—become relevant in the discovered combination. This
immediately leads to the identification of a new multivariable profile.

SUPPLIER M
CUSTOMS BROKER 1
NNNN. NX
ORIGIN COUNTRY B

©International Monetary Fund. Not for Redistribution

 Appendixes 263

APPENDIX J A GRADUATED PENALTY/SANCTIONS

REGIME
A strong, fair, and transparent penalty and sanctions regime is an essential part of
the customs compliance model. The penalty and sanctions regime ensures penal-
ties are applied uniformly, consistently, and in an equitable manner for offenses
of equivalent weight with the overall objective of molding client attitude toward
self-regulation. Penalties must be appropriate to the severity of the offenses
involved. Should they be too severe, administrations will hesitate to apply them,
which can lead to a diminished deterrence impact and open the administration
to pressures to settle cases inappropriately.
Customs offenses/breaches can generally be broken down into three categories:
the first category includes non-prosecutable breaches or contraventions that are
not serious in terms of customs revenue and that are subject to administrative
fines with no provision for prosecution.
The second category includes breaches, which are more serious and subject to
prosecution, but for which the offender can request an administrative settlement
by customs (sometimes referred to as a “prosecution avoidance fee” or “offense
settlement or compounding”). In some cases, customs may require permission of
the prosecutor (often the Director of Public Prosecutions) to assess the adminis-
trative penalty and avoid prosecution. There is a risk of lack of transparency if
such transactions are carried out without some form of disclosure or involvement
of the prosecutor in the decision.
The third category includes the most serious offenses for which customs will
pursue criminal prosecution leading to fines and/or imprisonment rather than
administrative actions. This includes offenses such as false declarations; fraudu-
lent or counterfeit documents; smuggling and possession of smuggled goods;
obstructing, threatening, or assaulting officers; and bribery. A prosecutions policy
is required that sets out the conditions under which offenders should be prosecut-
ed and the administrative procedures to follow. An administration’s penalty/
sanctions regime should be made public in order to promote transparency.
The following is an illustrative example of a graduated penalty scheme. Of
particular importance is the notion that repeated offenses lead to more serious
penalties.

©International Monetary Fund. Not for Redistribution

264 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX J Table 1
Sample Graduated Penalty Scheme
Second
Offense Third Offense
(within (within
specified time specified time
Customs Offense First Offense period) period) Comments
Category A. First-Level Offenses: Minor Offenses/Errors: Little or No Revenue Implications
A1. Revenue shortfall No penalty No penalty No penalty Customs corrects infor-
due to incorrect or mis- mation/administrative
leading information/ systems. Traders
advice provided by advised of correction
customs. action.
A2. Declaration error No penalty. No penalty. Penalty: 5% Minimum penalty to
with no revenue Notice of error Warning of duty paid encourage future
impact. issued/recorded. issued and value. compliance.
recorded. Sanctions may apply to
agents.

A3. Voluntary disclo- No penalty No penalty. No penalty. Repeated instances

sure made before client Official Formal indicate weaknesses in
notified of verification notice— warning client systems and
intervention (that is, corrective controls—increased
cargo inspection, audit, action monitoring may be
investigation). identified. needed.
Category B. Second-Level Offenses: Errors or Omissions That Have Revenue Implications and Are
Due to Importer Error or Negligence
B1. Incorrect Customs 5% of duty paid 35% of DPV 100–300% of For repeated offenses
declaration/documen- value (DPV), plus DPV, forfei- forfeiture of goods/
tation with revenue official warning, ture of conveyance and prose-
impact (incorrect tariff recorded in goods. cution are options
classification/valuation). enforcement Possible depending on the case
Failure to provide man- database. prosecution. (that is amount of reve-
datory information to nue evaded, extenuat-
assess tariff and valua- ing circumstances and
tion (and origin). so on).
No intent to defraud/
falsify documents.
B2. Provision of mis- 35% of DPV. 50% of DPV 100–300% Attempt to mislead
leading/incorrect infor- Goods forfeiture Goods forfei- of DPV. customs.
mation to Customs Prosecution ture Goods Does not include provi-
(description of goods, Prosecution forfeiture sion of false documen-
quantity, duty and tax Prosecution tation (see C 2 below).
calculation and so on)

©International Monetary Fund. Not for Redistribution

 Appendixes 265

APPENDIX J Table 1 (continued)

Category C. Third-Level Offenses: Cases of False Documentation with Intent to Evade/Defraud or
Outright Smuggling
C1. 200% of the DPV 300% of the 300% of the Prosecution for second
Fraud (false invoices, or goods DPV or DPV or forfei- and subsequent
alteration of docu- forfeiture goods forfei- ture of offenses attract stiffer
ments—wilful intent to Prosecution. ture. goods. penalties (fines,
evade duty/tax. Prosecution. Prosecution. prison).
Possible seizure and
forfeiture of goods and
conveyance.
C2. Smuggling 300% of the DPV 300% of DPV 300% of the As above.
or goods and or goods and DPV or goods
conveyance conveyance and convey-
forfeiture forfeiture ance
Prosecution. Prosecution. forfeiture
Prosecution.
C3. Obstructing, threat- Specific fines as Specific fines Specific fines These serious offenses
ening or assaulting per legislation. as per legis- as per are usually prosecuted
officers, bribery, use of Prosecution. lation. legislation. in accordance with leg-
firearms. Prosecution. Prosecution. islation. Penalties
include fines and in the
most serious cases
incarceration.

©International Monetary Fund. Not for Redistribution

266 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX K IMPLEMENTING SPECIFIC

ENFORCEMENT INITIATIVES
Customs Mobile Antismuggling Teams
Roles and Responsibilities
These specialized teams provide advanced examination capacity to follow up on
targets and profiles developed by customs intelligence and/or identified by oper-
ational staff and managers. Activities of mobile antismuggling teams that can
move to and operate at any location are focused on both contraband interdiction
and revenue evasion. Teams work with line staff who should be included in oper-
ations where feasible. Team operations should be guided by operational plans and
where available based on risk assessments, specific intelligence, requests from
operational areas or other agencies (in accordance with agreements), or the basis
of deterrence. Teams are expected to pass along any intelligence information they
gather to the Intelligence section.

Organization and Deployment

Typically, mobile antismuggling teams are composed of five to seven customs
officers and a supervisor. The number of teams deployed is based on identified
risks, geographic considerations, and resource availability. To the extent possible,
the teams should be available to support customs line operations. Joint operations
with other enforcement agencies such as the police, drug enforcement agencies,
border patrols, and military are common and can be extremely effective as either
individual projects or ongoing joint forces operations.

Selection and Training

Selection of team members should be based on identified interest, experience
including a good enforcement record, demonstrated initiative and potential, and
professionalism.
Training should include the following:
• Advanced enforcement and examination techniques by mode
• Use of contraband detection equipment including scanners and imaging
tools
• Interviewing and report writing
• Safe handling of firearms and if armed the full range of firearms training
• Arrest procedures, rules of evidence, and taking of statements
• Any training identified and deemed applicable by partner enforcement
agencies for specific joint operations

©International Monetary Fund. Not for Redistribution

 Appendixes 267

Keys to Successful Implementation of Antismuggling Teams

• Sound legal basis for operations
• Clearly established terms of reference and operational responsibilities
• High-caliber, professional staff (training programs)
• Vehicles, equipment, and tools
• Operational performance management systems
• Automated systems available (enforcement database, operating systems,
intelligence systems, risk management systems, and so on)
• Effective relationships with operational staff
• Effective interagency working arrangements

Establishing a Customs Fraud Investigations Capacity

Roles and Responsibilities
Customs investigations’ mandate is to uncover and investigate past instances of
fraudulent activities by traders and others involved in import/export. Forensic
investigation of customs fraud is an essential component of a compliance/enforce-
ment strategy. In addition to detecting and penalizing fraudulent activities, their
actions, particularly prosecutions, act as a strong deterrent to those who would
violate customs legislation through fraud. Investigators regularly execute search
warrants to obtain evidence in support of investigations and develop cases for
potential prosecution.

Organization and Deployment

The head of investigations should be a senior level reporting directly to the exec-
utive in charge of enforcement (often a deputy head of customs). An investiga-
tions unit must consist of dedicated, full-time investigators who are not distracted
by other operational work. Investigators should not participate in enforcement
operations (antismuggling patrols, examination of goods, and so on) other than
in exceptional situations or as part of an investigation.
The size of an investigations unit depends on the workload, which reflects
trade volumes as well as other factors such as levels of voluntary compliance,
enforcement capacity and results, and the nature and level of development of the
trading environment. As a general guideline, in small administrations an investi-
gations unit should consist of a minimum of two to four investigators plus a head
and support staff. Larger administrations will have more investigators to cope
with higher trade volumes and greater potential for fraud.
Investigators work closely with all customs operational units as these will be
the primary sources of case referrals. They also have frequent contact with other
agencies such as taxation, other regulatory agencies, and the police regarding

©International Monetary Fund. Not for Redistribution

268 Customs Matters: Strengthening Customs Administration in a Changing World

serious cases of fraud and to share information and intelligence. In cases of serious
fraud involving other legislation (criminal code, income tax, and so on), investi-
gators may refer cases to the appropriate agency for action.

Selection and Training

Investigations is a specialist function that requires staff with professional skills and
knowledge. Officers should have a university bachelor’s degree, significant cus-
toms experience, good knowledge about its laws, regulations, procedures, and
systems and also of criminal procedures (rules of evidence, court procedures and
testimony), and strong communication and writing skills. Motivation, reliability,
and integrity are vital attributes.
Training should include the following:
• Customs and criminal legal provisions
• Customs penalty structure and policies
• Forensic accounting and audit techniques
• Fraud investigations techniques and procedures
• Rules of evidence (gathering, safekeeping and handling) and court procedures
• Report writing
• Interviewing, interrogation, and special investigative techniques
• Law enforcement operation planning and implementation
• Risk management theory and practice
• Use of automated systems and tools

Keys to Successful Implementation of an Investigations Function

• Adequate legal powers and authorities
• Well-trained, experienced, professional investigators
• Transparent investigations procedures and standards
• Appropriate penalties and sanctions
• Provision of ICT systems (intelligence database, enforcement database, file
management system, access to all operational systems, access to external
databases and systems)
• Effective interagency working relationships (tax department)

Establishing a Customs Intelligence Capacity

Roles and Responsibilities
Customs intelligence consists of two major elements: strategic intelligence and
analysis and operational/tactical intelligence. A headquarters-based strategic
intelligence and analysis function provides strategic risk assessments of

©International Monetary Fund. Not for Redistribution

 Appendixes 269

emerging threats that are used by senior management in setting enforcement

priorities and making high-level resource deployment decisions. Operational/
tactical intelligence supports managerial decision-making on deployment of
operational resources, project planning for specialized enforcement teams, and
interagency projects. It provides actionable intelligence through lookouts, risk
assessments, and briefings of both a local and national nature for use in target-
ing high-risk transactions and parties for enforcement action. It serves as the
contact point between the intelligence organization and operating customs
officers.
Intelligence comes from a variety of sources and in a variety of formats.
Human intelligence is perhaps the most common form of intelligence and is
generally related to the more tactical and operational environments. Sources of
information include confidential informants, industry sources, other domestic
law enforcement agencies, foreign customs administrations and law enforcement
agencies, and international agencies such as the WCO, INTERPOL, regional
intelligence offices, and so on. Information also comes from open sources such as
the internet, publications, and government reports as well as from closed (confi-
dential) sources such as bulletins and notices issued by enforcement and intelli-
gence agencies, both domestic and foreign, internal documents, and signals
intelligence provided by intelligence organizations.

Organization and Deployment

Customs intelligence organizations must be staffed by full-time dedicated special-
ists led by professional intelligence experts; this work cannot be undertaken on a
part-time basis. The head of headquarters intelligence must report to the execu-
tive in charge of enforcement.
Field intelligence operations will vary in size depending on the size of the
customs organization and the demands. As a minimum each regional operation
should have an intelligence unit. Officers need to develop close working relation-
ships with customs staff and local law enforcement agencies as well as with other
sources of intelligence information including confidential sources.

Selection and Training

Staff selected for the intelligence unit should be motivated, competent officers
with significant experience including in enforcement. They need solid analytical
and communication skills and good IT knowledge. Intelligence officers require
specialized training in the following.
• Customs intelligence processes and techniques
• Analytical skills (including use of databases and automated analytical tools)
• Interviewing and report writing techniques
• Sound communications skills
• Surveillance techniques

©International Monetary Fund. Not for Redistribution

270 Customs Matters: Strengthening Customs Administration in a Changing World

Keys to Successful Implementation of an Intelligence Function

• Adequate legal powers and authorities
• Clearly defined roles, responsibilities, and authorities
• Well-trained, experienced, professional intelligence officers
• Effective interagency working relationships and information sharing
agreement
• Access to essential ICT systems (databases, intelligence systems)
• Risk management policies and systems

Strengthening Post clearance Audit

Roles and Responsibilities
Post-clearance audit (PCA) is also discussed in Chapters 4 and 5, in particular its
connection to trade facilitation and risk management respectively. This discus-
sion’s focus on PCA is in terms of its contribution to the enforcement program
and how to strengthen its effectiveness.
In addition to increasing compliance and generating revenue, PCA plays a key
role in the enforcement process as a major source of information for the purpose
of risk management and as a valuable source of case referrals for customs investi-
gations. Results of audits need to be provided to the risk management team in
order to update risk profiles and criteria and to establish targets for future verifi-
cation. When an auditor uncovers evidence of potential fraud (for example,
duplicate invoices, false records, evidence of unreported payments, and so on),
those observations are to be communicated to the investigations team for review.
Should the review find insufficient evidence of fraud, the audit would continue.
However, if evidence of fraud is uncovered, then the audit is terminated and the
case turned over to investigations for action and potential prosecution. When
functioning effectively, PCA is a major source of investigations cases.
A critical factor in the success of efforts to reduce customs interventions at the
time of goods clearance by refocusing verification efforts on pre- and postclear-
ance processes is the establishment of a well-resourced and effective PCA pro-
gram. This shift has resulted in significantly increased workload of PCA units, as
more and more transactions are referred for postrelease verification. Two elements
of this postrelease verification have emerged. The first is the post-clearance review
of transactions. This entails reviews of declarations for quality and compliance
that are selected for the “blue channel.”17 Post-clearance assessment units review
the tariff classification, valuation, and origin declaration for compliance based on
risk assessments and taking into account resource availability. This is not PCA,
but a postrelease verification that can be carried out at local offices or at a central

17
The ASYCUDA system has blue channel, and a transaction-based audit is carried out using this
channel function.

©International Monetary Fund. Not for Redistribution

 Appendixes 271

location. Information on results of reviews must be communicated to PCA for

use in identifying potential risks in developing their audit plans, and back to
operating areas as feedback on quality.
PCA is the second postrelease verification element and audits traders in accor-
dance with a risk-based audit plan. These audits (which may be desk audits or
on-site audits) are time-consuming, and only a limited number of full audits can
be carried out in any given year. In many cases, administrations have not devoted
sufficient resources to fully implement this critical program. This creates a com-
pliance gap and increased risk of revenue evasion.

Organization and Deployment

Often the program suffers from a shortage of staff, weak skill levels due to inad-
equate training, poor application of risk management in audit selection and
planning, and in some cases lack of clear legal authorities. External challenges
include general low levels of compliance by traders and in particular with record-
keeping requirements.
To succeed, PCA needs to be integrated as a critical element of the customs
compliance verification and enforcement program, although it would not directly
report to the enforcement organization. While smaller administrations with auto-
mated customs processing systems in operation often centralize the PCA function
at the headquarters level, most customs administrations create regional PCA units
to ensure proximity to importers’ premises for on-site audits. These units gener-
ally come under the direction of the national PCA office to ensure consistency
and coordinated implementation of audits. Headquarters PCA teams focus on
larger importers with operations in a number of locations, or that involve com-
plex audits. All audits are carried out in accordance with the annual audit plan.

Selection and Training

Staff assigned to PCA should have significant customs experience and a good
knowledge of customs requirements and automated systems as well as of account-
ing and auditing practices. Strong communication and writing skills are import-
ant. PCA officers require training in the following areas:
• Accounting and audit principles and techniques
• Advanced customs theory and practices (tariff, valuation, origin, exemption
regimes, and so on)
• Research and report writing
• Interviewing techniques
• Risk management theory and practice
• Use of automated systems and tools

©International Monetary Fund. Not for Redistribution

272 Customs Matters: Strengthening Customs Administration in a Changing World

Keys to Successful Implementation of Post-Clearance Audit

• Clearly delineated role and responsibilities of the PCA unit (including posi-
tion descriptions)
• Appropriate legal requirements and authorities in place (for example, books
and records, powers of officers)
• Adequate staffing levels based on workload (audit plan)
• PCA integrated into the risk management and compliance strategies
• Risk-based annual audit plans with performance measurement criteria
• Trusted trader program (AEO) audits included in audit plans
• PCA audit manual in place
• Professional audit training (external resources often required) provided
• Criteria and procedures established for PCA referrals to investigations
• PCA staff have direct access to customs operating systems (including
enforcement databases) and automated PCA case management and report-
ing database in place

Customs Marine Patrol Units

Roles and Responsibilities
To enhance border protection, many customs administrations with marine or
inland water borders establish customs marine units to patrol marinas, inland
lakes, rivers, and coastal waters. While their primary task is prevention and inter-
ception of smuggling and other illegal operations (such as human trafficking,
illegal fishing, and so on), they are often used to facilitate remote reporting by
pleasure craft and verify their status. They provide customs with the capacity to
participate in joint marine operations with other agencies such as the coast guard,
marine police, and military in accordance with MOUs with the partner agencies.
Generally, customs patrol vessel operations are limited to coastal waters and
inland lakes and rivers, although in larger administrations deep water patrol ves-
sels may be deployed.
Operational costs of marine patrol vessels, particularly larger vessels, can be
extremely high and for smaller administrations may be prohibitive. Careful feasi-
bility studies including threat assessments need to be undertaken before a decision
is made to invest in a marine patrol program. Clear policies and procedures on
officer safety and security are essential. Adequate and ongoing budget provisions
must be made to ensure the continuing operation and maintenance of these
expensive assets.

Deployment and Operational Requirements

Vessels must be “built to purpose” to meet the operating mandate and environ-
ment in which they will operate. They must be equipped with all necessary safety

©International Monetary Fund. Not for Redistribution

 Appendixes 273

and boarding equipment, searchlights and sirens, and so on. A radio communi-
cations system will be required, preferably one that can connect with other agen-
cies. Vessel marking must clearly identify the vessel as customs. Intercepting,
boarding and searching vessels on the open water can be a dangerous undertaking
and customs officers have to be prepared to respond to threats and possible vio-
lence. Great care needs to be taken to manage the risks of these patrols and to
ensure staff are properly trained, equipped, and supported by law in their actions.

Selection and Training

Selection of marine patrol team members should be based on identified interest,
experience including a good enforcement record, demonstrated initiative, and
potential. Qualified/licensed persons are required to operate patrol vessels and can
be either qualified customs officers or contract mariners.
Marine patrol officers require the following specialized training:
• Professionally recognized training/certification for the operation of the
vessel
• Marine safety procedures and policies
• Use of marine related contraband detection equipment
• Vessel boarding and securing
• Vessel rummaging techniques
• Interviewing and report writing
Team members should also be fully trained in the safe handling of firearms;
armed officers should have the full range of firearms training (including regular
recertification).

Keys to Successful Implementation of Marine Patrols

• Sound legal base for operations
• Deployment based on feasibility study (risk assessment, capital and operat-
ing costs, operating considerations)
• Appropriately sized and fully equipped vessels for the operating environ-
ment/mandate
• Adequate operational funds to ensure continuity (operating, repair and
maintenance)
• Professional staff recruited/trained in marine procedures and customs rum-
mage techniques and so on
• Comprehensive operating/safety procedures and policies in place
• Effective working relationships and legal arrangements with other law
enforcement agencies

©International Monetary Fund. Not for Redistribution

274 Customs Matters: Strengthening Customs Administration in a Changing World

Deployment of Contraband Detection Technologies

Application
Proper deployment of state-of-the-art contraband detection technology (CDT)
and equipment is critical to effective customs enforcement. These expensive
devices require proper management and utilization to produce results, including
the application of risk management. Users need to be adequately trained and
equipment needs to be maintained. Systems to record and provide reports on the
results of all inspections—both resultant and non-resultant linked to risk man-
agement/targeting systems—are required. While a small percentage of consign-
ments should be randomly selected for inspection to gauge overall compliance
levels, untargeted random inspections should be the exception to decrease the
burden to legitimate trade.
Customs detector dogs (K9 units) are widely deployed throughout the world
and have proven to be effective in virtually all modes—passenger processing,
cargo inspections, postal and express consignment, and vessel and vehicle
searches—and for the detection of various types of goods. Also, one dog can be
trained for the detection of more types of goods (explosives, narcotics, currency,
and so on). In addition to their operational roles, they provide very effective
public relations services. However, detector dog programs are expensive to main-
tain, require specialized and ongoing training for both the dogs and handlers, and
require frequent down time. They require careful management and oversight to
ensure that effective levels of performance are maintained.
Customs officers and mobile antismuggling teams require a variety of portable
contraband detection kits including digital camera/video recorders, laser range
finders, Video Scope (fiber scope), Buster Contraband Detector units (for scan-
ning concealed spaces for potential contraband), flashlights, inspection probes,
field drug test kits, extendable mirrors with lights, night vision goggles, drones,
and basic inspection tools (screwdrivers, crowbars, wrenches, wire cutters, and so
on). These tools make physical inspections faster, more reliable, and less intrusive
and enable officers to carry out their inspections in a professional manner.

Risk-Based Deployment
Decisions on the types, numbers, and location of contraband detection technol-
ogies require careful consideration given their costs and operational requirements,
particularly large container and vehicle scanners, which can cost large sums to
purchase and operate. The administration must clearly articulate the nature and
extent of risks the technologies are intended to address, the operating environ-
ment in which they are to be deployed, and the level of investment to be made.
Are they intended to address revenue risks (undeclared or mis-described cargo),
illicit contraband (narcotics, illegal firearms, weapons of mass destruction, and so
on), environmental threats (endangered species, toxic waste), and/or strategic
exports controls? In which modes are they most likely to be effective? Is there a

©International Monetary Fund. Not for Redistribution

 Appendixes 275

need for mobile scanners? Are they needed for import or export controls or both?
The answers to these questions will inform the decision-making process.

Operations
Scanners, in particular large vehicle and container scanners, should be linked to
a targeting system to ensure that inspections are not entirely random or untarget-
ed. There are many targeting systems in operation, and more administrations are
establishing direct links between these systems and the scanners. Targets are being
sent directly to the scanner operating system, and the outcomes of targeted scans
(both resultant and non-resultant) are reported back through the system.
Reporting systems should be in place for all contraband detection technologies
to provide information on their use and the results achieved. This information is
essential to ensure the equipment is properly utilized, addressing identified risks
and producing results. Informed decisions can be made on the deployment (or
redeployment) and operation of the technologies and, where problems exist, on
corrective measures to take.

Keys to Successful Deployment of Contraband Detection Technologies

(CDTs)
• Base deployment of CDTs on assessments of risk/threats (cost/benefit
analyses)
• Integrate CDT into enforcement strategy
• Minimize random cargo/container inspections—link directly to risk-based
targeting systems
• Provide operating staff with appropriate training in use of the CDT
• Establish reporting systems to record activities and results
• Ensure inspection charges are reasonable
• Provide operating staff with adequate inspection tools and devices
• Establish management oversight and monitoring mechanisms

©International Monetary Fund. Not for Redistribution

276 Customs Matters: Strengthening Customs Administration in a Changing World

APPENDIX L EXAMPLE OF AN OUTLINE OF A

DEVELOPING COUNTRY’S CUSTOMS
ADMINISTRATION ENFORCEMENT STRATEGY

A. Overview
Objective
Development of a medium-term enforcement strategy (covering three to five
years) to improve the effectiveness of enforcement operations through developing
professional capacity and strengthening operational effectiveness based on risk
management principles and use of customs intelligence.

Scope
The strategy covers all enforcement and compliance verification activities includ-
ing antismuggling, intelligence and analysis, interagency and international coop-
eration, investigations, marine patrols, risk management, post-clearance audit,
contraband detection equipment, and ICT development.

Outcomes
• Improved capacity of customs staff, improved professionalism
• Increased enforcement results (additional revenue, number of cases, contra-
band seizures and so on)—note that lower results can signal better compli-
ance
• Improved levels of voluntary compliance (deterrence)
• Provision of essential enforcement tools and equipment (vehicles, vessels,
and so on)

B. Strategy Outline
Introduction
• Statement (preface) by the director general
• Purpose and scope of the enforcement strategy
• Current developments in the domestic economy and trade flows
• International context (smuggling, security/antiterrorism, and so on)
• Brief outline of the contents of the strategy and its implementation

Legal and Institutional Framework

• Legal framework (mandate, powers and authorities)
Customs legislation–legal authorities for enforcement
{

©International Monetary Fund. Not for Redistribution

 Appendixes 277

{ Other relevant national laws and regulations

{ International commitments and obligations
• Relevant government policies and programs
{ Economic development, trade policies, and so on
{ Government fiscal plans (for example, revenue mobilization strategies)
{ Drug control policies and programs
{ Other (IPR, CITES, and so on)
• Customs administration’s strategic objectives and reform and modernization
strategies

Assessment of Existing Customs Enforcement Programs

A review of current enforcement strategies, programs, capacities, and organiza-
tion, including identification of strengths and areas in need of improvement in
the enforcement operations.
a. Current enforcement organization and programs
• Mandate, roles and responsibilities of the enforcement organization
• Organizational structures (including resources assigned to enforcement (by
function and location)
• Existing action plans/strategies
• Inventory of tools and equipment (vehicles, equipment, IT capacities, and
so on)
• Interagency/international cooperation
b. Review and analysis of enforcement results (historical data)
Analysis of enforcement actions (number of cases, types of goods seized (illicit
drugs, contraband, revenue—vehicles and so on) by locations, modes (past three
to five years), penalty assessments, revenue generated, prosecutions, and so on.
c. Assessment of strengths, weaknesses, opportunities, and threats (SWOT
analysis)
A SWOT analysis is a planning tool used in the development of a strategic or
business plan and is generally carried out in the early stages of the plan development
as part of an environmental scan exercise in which an examination is undertaken of
the internal and external factors that influence the organization and its plans.

Threat Assessment
This section identifies and analyzes current and emerging smuggling and other
enforcement threats (commercial fraud, smuggling, illicit drugs, the Washington
Convention on Controlling International Trade in Endangered Species of Wild
Flora and Fauna [CITES], Intellectual Property Rights, security/terrorism,
WMD, export control of strategically sensitive goods, and so on). It provides a
basis upon which to develop the enforcement strategy priorities.

©International Monetary Fund. Not for Redistribution

278 Customs Matters: Strengthening Customs Administration in a Changing World

A structured risk analysis process identifies and rates all potential risks and
threats faced by customs. It takes into account past results and enforcement data
and analysis as well as input from officials based on intelligence, experience,
trends and the current situation.
Threats are identified in as much specific detail as possible (specific commod-
ities, locations, sources, modus operandi, groups or individuals involved, estimat-
ed revenue losses, and so on).
The threat assessment also includes an assessment of customs’ existing capaci-
ties and vulnerabilities in terms of resources, physical tools, and equipment,
including IT, staff capacities, weaknesses in control systems—border clearance,
post-clearance verification—fraud investigation, and so on (based in part on the
preceding SWOT exercise).

Enforcement Policy and Guiding Principles

Customs Enforcement Policy Statement
“The customs administration will manage its operations to do the following:
• Support the goals and objectives of government
• Protect the revenue and the borders of the country
• Ensure that revenue collection and enforcement goals are accomplished in a
fair, equitable and transparent manner with due regard for the rights of its
clients and of the citizens
• Achieve compliance through a mix of measures to facilitate voluntary com-
pliance and enforcement measures to deter, detect and penalize intentional
noncompliance”
(Specific policies can be included here for antismuggling and so on.)
Enforcement Guiding Principles
This section outlines the fundamental principles that will guide the development
and implementation of the enforcement strategy. They set the ground rules for all
initiatives and operations proposed in the strategy as well as providing a frame-
work for assessing any new proposals or initiatives. For example:
• Voluntary compliance and effective enforcement are complementary
• Customs legislation that provides adequate enforcement powers and authorities
• An organizational culture of risk management
• An effective penalty regime that supports enforcement and sanctions illegal
activities
• Interagency cooperation and coordination
• Well-trained professional customs enforcement officers
• An objective, transparent appeal system
• An effective use of ICT and contraband detection technology

©International Monetary Fund. Not for Redistribution

 Appendixes 279

• Enforcement is every customs officer’s business

• Customs enforcement practices comply with international best practice and
standards

Enforcement Objectives and Priorities

This section includes high-level objectives of the enforcement strategy that
respond to the assessed threats and risks identified previously to the assessment of
the existing enforcement organization and its performance identified as well as
taking into account the priorities and direction of the government. Specific
results-oriented and measurable goals and high-level performance indicators are
set out in this section.

Action Plans
Detailed action plans to implement the strategic objectives, priorities, and goals
identified in the strategy are included here. Action plans should include specific
actions, time frames for completion, results to be achieved, and performance
measurement criteria with assigned responsibilities. A standardized project plan-
ning format is used to facilitate monitoring and evaluation of progress.
Regular progress reports are prepared as part of the planning evaluation pro-
cess and incorporated into the management reports. The strategy and plans are
reviewed and updated as needed to reflect changing conditions and threats on an
annual basis.

©International Monetary Fund. Not for Redistribution

 This page intentionally left blank

©International Monetary Fund. Not for Redistribution

Index

Boxes, figures, notes, and tables are indicated Arusha Declaration on Integrity in
by b, f, n, and t following the page Customs (WCO), 80, 91, 101–102
number. assessment methodology for economic
operators, 168–170, 169–170t,
A 250–253, 250–251t, 253f, 253t
accountability, 73, 75–76, 101–102, 112 Association of Southeast Asian Nations
Acosta-Ormaechea, Santiago, 40n13, (ASEAN), 10
41n16 ASYCUDA World, 119, 204n3, 205n4
Addis Ababa Program of Action, 1 audits. See post-clearance audits
administrative burden reduction augmented reality (AR), 232–233
strategies, 117–120, 118b, 204n3, Australia
205n4 Japan-Australia Economic Partnership
advanced economies Agreement, 55n37
customs enforcement powers in, 179, modernization of customs
180f administration in, 72b
pre-arrival electronic data and, 152, authorized economic operators (AEOs)
152f compliance history components of,
revenue collections in, 9, 9f 247–249t
risk management application in, 133, customs enforcement and, 188
134f defined, 36n6
tariff averages in, 7, 7t integrated risk management and, 140b,
tax administration data shared with 150–151, 151b, 151f
customs, 162, 162f for international supermarket
TIN and e-signature use in, 151, 151f chains, 36
advance rulings, 102, 104–106 mutual recognition agreements
Agenda 2030, 1 and, 124
Andean Community, 124 national security and, 18–19, 19n12
annual audit plans, 161–162, 163b prior actions for, 150, 151n9
antidumping measures, 13, 40 segmentation and assessment
antismuggling enforcement. See customs methodology, 168–170, 169–170t,
enforcement 250–253, 250–251t, 253f, 253t
appeals processes, 69, 105–106, 112–113, trade facilitation and, 109–112
184–185 automated contents verification (ACV),
artificial intelligence (AI) 226–227
administrative burden reduction automated threat detection (ATD),
and, 119 226–227
for data usage optimization, 246
digitalization of customs administration B
and, 220, 223–225, 223n28, 224f back-end operations, 211–212
pre-arrival control and, 153b BACUDA (BAnd of CUstoms Data
risk cluster identification and, 172 Analysts) of WCO, 222n27
scanned image analytics and, 225, The Bahamas, customs enforcement in,
225n32 176, 176n1

281

©International Monetary Fund. Not for Redistribution

282 Customs Matters: Strengthening Customs Administration in a Changing World

Bangladesh, tariffs in, 53n33 C

banking sector Cambodia
customs–bank cooperation and, 62 customs enforcement in, 176, 176n1
letters of credit and, 36, 37b customs–tax cooperation and, 212
Barbados, modernization of customs modernization of customs
administration in, 67–68 administration in, 71, 77n3
base erosion, 52 Capability Maturity Model Integration
Basel Convention, 15 (CMMI) of Software Engineering
Belize, trusted trader program in, 110 Institute, 205n6
Benin, customs–tax cooperation capacity building development cycle, 73
and, 212 carbon taxes, 15, 48–51
Bernard, Danielle, 95 cargo
big data, 153b, 213–214, 221–224, 224f bonded transit transportation of, 35
bilateral trade agreements, 22, 81–82 bonded warehouses for, 102, 227
bill of lading (B/L), 36, 37b, 62 diversion risks and, 35, 42, 227
black market, size estimates for, 45b, inspections of. See inspections
45n20 management of, 153–154, 207, 215
blockchain, 25, 231–232, 231nn42–44 misclassifications of. See cargo
blue lane, 124 misclassifications and
bonded transit transportation, 35 undervaluations
bonded warehouses, 102, 227 pre-arrival clearance protocols for, 119–
border management 120, 150–152, 151–152f, 152–153b
cooperative arrangements for, 57, release of. See cargo release
76–77, 181–182, 181n4, 182n7 selectivity criteria and. See selectivity
joint border controls for, 124 criteria
security and, 2, 15–19, 55n36, 76–77, targeting and. See cargo targeting
225, 242 traceability of. See cargo traceability
transparency and, 87 cargo misclassifications and
bottlenecks undervaluations
administrative, 22, 114 artificial intelligence and, 223
of customs data, 166b compliance risks and, 146b
time-release studies for, 126 customs enforcement and, 197
Brazil exports and, 158
digitalization of customs administration risk cluster identification and, 171
in, 223n28 sensitive or difficult to classify goods
e-invoice program in, 154 and, 157b, 157n13, 254
trade facilitation in, 114 single-window portals and, 116
Bremeersch, Christian, 5 tax evasion and, 98
BRS Conventions, 15 cargo release. See also green channel
Brussels Definition of Value (BVD), 60 administrative burden reduction and,
build-operate-transfer public-private 119–120
partnerships (BTO-PPPs), 215–216, coordinated interagency inspections
215n18, 228 for, 117
Bulgaria, modernization of customs fairness in, 105
administration in, 72b integrated risk management and, 157b
business continuity plans (BCPs), 92–93, pre-arrival controls and, 152
93b trade facilitation and, 127
business process automation, 228–229 cargo targeting. See also inspections;
business process reengineering (BPR), 114 selectivity criteria

©International Monetary Fund. Not for Redistribution

 Index 283

data optimization and, 141 Integration) of Software Engineering

international cooperation for, 82 Institute, 205n6
national targeting centers for, 190–191, CMSs (customs management systems),
190n12 206
post-clearance audits and, 61 cognitive robotic process automation
pre-arrival clearance and, 150–152, (CRPA) bots, 229
152–153b collaboration. See cooperation and
cargo traceability collaboration
carbon border taxes and, 50–51 Common Market for Eastern and
electronic data exchanges and, 205 Southern Africa (COMESA), 10
excisable items and, 46–47, 46n22 competitiveness
free zones and, 12, 59 compliance risks and, 143
integrated risk management and, 132, customs regulations supporting, 11–12,
153–154, 154b 175, 181
tax evasion estimates and, 44b integrated risk management and,
tracking devices for, 123–124, 131, 143
227–228 transparency of customs procedures
transport patterns and, 34 and, 87
Caribbean Community and Common VAT and, 38, 40
Market (CARICOM), 68 compliance. See also authorized economic
CBEZs (cross-border economic zones), operators; post-clearance audits;
57, 57n40 trusted trader programs
CCP (Container Control Programme), 17 carbon border taxes and, 50
CDTs (contraband detection consumer protection and, 16
technologies), 186, 192, 274–275 customs enforcement and, 177,
C-efficiency, 43, 45–46, 46f 177b, 183
CEMAC (Economic and Monetary customs–tax cooperation and, 78–79
Community of Central Africa), 10 customs valuation controls and, 62
Central America. See also specific countries data analytics and mining, 218,
administrative burden reduction 218n23
in, 118 data sharing and, 26
regional transit of goods and, 123–124 foreign trade statistics and, 14
trade facilitation in, 120–121 integrated risk management and,
Central American Integration, 124 143, 168
China international standards and mutual
data volume increases in, 221n26 recognition for, 25
SEZs in, 57n41 key performance indicators for,
United States, trade tensions with, 237–238
23–24 lack of, VAT collection and, 41–45
CITES (Convention on International modernization of customs
Trade in Endangered Species of Wild administration and, 126–127
Fauna and Flora), 17–18, 122 monitoring for, 150
Clark, R. James, 95 post-clearance audits and, 160–161
climate change, 15 publications access and, 102
cloud computing, 220–221, 229–230, transparency and, 100–101, 104
230n39 compliance gap, 43, 45, 46f
CMAAs (customs mutual assistance compliance histories, 109, 111, 119, 168,
agreements), 62, 62n51, 81, 121 184, 247–249t
CMMI (Capability Maturity Model compliance risks, 26, 143, 146, 146–147b

©International Monetary Fund. Not for Redistribution

284 Customs Matters: Strengthening Customs Administration in a Changing World

confidentiality. See data privacy and integrity management framework and,

protection 90–91, 91b
conflict-affected states. See fragile and penalty application and, 184
conflict-affected states professional customs staff and, 185
consignment criteria, 59n46 single-window platforms and, 116
consumer protection. See environmental Costa Rica
and health protection administrative burden reduction
consumption taxes, 40n13 strategies in, 118
contact centers, 102–104, 104f, 229 guidance documents, access to,
container codes, 245, 245n2 104–105
Container Control Programme (CCP), 17 counterfeit products, 12, 16
continuity planning, 92–93, 93b counterterrorism, 18–19, 225
contraband detection technologies country of origin. See origin rules
(CDTs), 186, 192, 274–275 COVID-19 pandemic
Convention on Facilitation of administrative burden reduction
International Maritime Traffic strategies and, 119
(International Maritime cloud computing use and, 230
Organization), 77 continuity planning and, 92, 93b
Convention on International Trade in cost of, 1
Endangered Species of Wild Fauna customs–private sector engagement
and Flora (CITES), 17–18, 122 and, 80
cooperation and collaboration. See also digitalization and, 203, 207
customs–tax cooperation; data e-commerce, increase in, 36
sharing economic reforms and, 22
for border management, 57, 76–77, international trade decrease and, 7
181–182, 181n4, 182n7 slowbalization and deglobalization, 21,
compliance facilitation and, 177b 21n14
for customs enforcement, 180–184, trade facilitation challenges and, 98–99
191–193 Crandall, William, 241
customs-to-customs, 62, 80–82, 117 criminal investigations and prosecutions,
interagency inspections, 116–117 179, 193, 242, 263, 267–268
international, 80–82 Cross-Border E-Commerce Framework of
mutual recognition agreements for, Standards (WTO), 23
111–112, 124 cross-border economic zones (CBEZs),
for regional transit of goods, 122–124 57, 57n40
silo mentality and, 208–209, 208n9, cross-border shopping, 42, 42n17
209n10 CRPA (cognitive robotic process
for trade facilitation, 107–109, 108f automation) bots, 229
core value training, 88–89 cultural heritage goods, 18
corporate functions, 85 customer service, 102–104, 104f, 229
corporate income tax, 36, 52, 59, 183n8 customs administration, 2, 5–31
corruption competitiveness, support for,
appeals processes to reduce, 112, 185 11–12, 175
breaches of data privacy and, 212n13 crime and. See criminal investigations
coordinated border management to and prosecutions; organized crime
reduce, 77 data collection and, 26. See also data
customs–private sector engagement collection
and, 80 digitalization of, 25. See also
digitalization and, 205, 207 digitalization

©International Monetary Fund. Not for Redistribution

 Index 285

disruptive technologies and, 218–233. integrity management framework and,

See also disruptive technologies 90–91, 91b
domestic tax collection and, 8–9, 8–9f. international cooperation and, 80–82
See also tax administration key performance indicators and,
enforcement of, 175–202. See also 73–75. See also key performance
customs enforcement indicators
foreign trade statistics production and, legal and regulatory framework, 86–87
14–15 modernization program and, 68–69,
foundations of, 2–3, 67–94. See also 69b
customs administration foundations organizational structure and, 82–86,
in fragile and conflict-affected states, 83b, 243–244
26–27, 27b. See also fragile and policy and program development, 86
conflict-affected states political commitment and, 67–68
global framework for, 23–25, 24b private sector engagement and, 80
illegal trafficking and, 16–18, 17t. See strategic planning and, 70–73, 72b
also illegal trafficking tax cooperation and, 77–79, 241–242
intelligence gathering and, 19, transparent and predictable procedures,
189–190, 195, 268–270 87
international institutions’ role in, workforce and, 87–89, 89–90b. See also
27–29, 28t customs staff
international trade patterns and, 21–23 customs–bank cooperation, 62
modernization of, 1–2 Customs Blueprints of EU, 235n1
national security and counterterrorism, customs clearance. See also cargo release
18–19, 19n12, 225 audits of. See post-clearance audits
organizational structure. See back-end operations, disconnect with,
organizational structure for customs 211–212
risk management and, 19–20, customs valuation and, 61
131–173. See also integrated risk digitalization and, 119, 204n3,
management 205–209, 205n4, 214–216
slower trade growth and, 5–7, 6f documents required for, 36
staff. See customs staff; training of expedited. See authorized
customs staff economic operators; trusted trader
standards and regulations application, programs
15–16. See also legal and regulatory fees for, 215–216, 216nn19–20
frameworks green channel for. See green channel
tariffs and, 7–8, 7t. See also tariffs integrated risk management and,
trade and tax policies’ effect on, 33–65. 155–157, 155–156t, 156–157b
See also trade and tax policies key performance indicators for, 73,
trade defensive measures and, 13–14 236–237
trade facilitation and, 12–13, 95–129. pre-arrival protocols for, 119–120,
See also trade facilitation 150–152, 151–152f, 152–153b
trade policy implementation and, tax evasion and, 44b
10–11, 11t trade facilitation and. See trade
customs administration foundations, 2–3, facilitation
67–94 transport patterns and, 33–35
border management and, 75–76 Customs Convention on International
business continuity planning and, Transport of Goods Under Cover
92–93, 93b of TIR Carnets (TIR Convention,
governance and accountability, 75–76 1975), 122

©International Monetary Fund. Not for Redistribution

286 Customs Matters: Strengthening Customs Administration in a Changing World

customs enforcement, 3, 175–202 customs management systems (CMSs),

antismuggling teams and, 193–194, 206
266–267 customs mutual assistance agreements
appeal mechanisms for, 184–185 (CMAAs), 62, 62n51, 81, 121
challenges in, 175–176 customs processes, 19–20. See also
contraband detection technologies and, integrated risk management;
186, 192, 274–275 simplification of customs processes
criminal investigations and customs staff
prosecutions, 179, 193, 242, 263, antismuggling teams, 193–194,
267–268 266–267
customs intelligence capacity and, artificial intelligence and, 225
268–270 corrupt practices of. See corruption
field intelligence operations and, 195 customs enforcement and, 185–190
field operations and, 194 data analytics and, 222
headquarters functions for, 188–190 data protection and privacy, 213
ICT systems for, 186, 192–193 enterprise-level management support
interagency cooperation and and, 209–211
coordination for, 180–184, 192 field operations, 193–195
interagency risk management and, human resources management and,
191–192 87–89, 89–90b, 145b, 149b,
international standards and best 239–240
practices, 187 integrity management and, 90–91, 91b
joint forces operations for, 195 professionalization of workforce
key performance indicators for, 239 and, 75
marine patrols for, 195, 272–273 staff appraisal management, 75
national targeting centers and, 190– training of. See training of customs staff
191 customs–tax cooperation
officers and staff, 185–190 benefits of, 51–52
operational performance management carbon border taxes and, 51
system for, 199–201, 200b customs enforcement and, 182–184
organization of, 187–188 data sharing and, 79, 212, 242
penalty regime to support, 184, 263, digitalization and, 212
264–265t integrated risk management and, 159,
post-clearance audits and, 193–194, 161–162, 162f
270–272 issues in, 241–242
power and authorities for, 179, 180f modernization of customs
principles of, 176 administration and, 77–79
risk management and, 178 VAT and, 42, 46
strategy development for, 196–199, customs-to-customs cooperation, 62,
198–199b, 276–279 62n50, 80–82, 117
technologies for, 201 customs unions, 10, 10n3, 11t
voluntary compliance and, 177, 177b customs valuation. See also cargo
customs environment, 70–71 misclassifications and
customs escort services, 35, 123 undervaluations
Customs Financial Intelligence C-efficiency and, 45, 45n21
Cooperation Handbook (Egmont customs enforcement and, 183, 183n8
Group & WCO), 159 import declarations and value-added
customs intelligence, 19, 189–190, 195, tax, 41–42
268–270 integrated risk management and, 146b

©International Monetary Fund. Not for Redistribution

 Index 287

overvaluation of goods and, 146b, on foregone revenue, 58

183n8 foreign trade statistics and, 14–15
pre-declarations for, 208 integrated risk management
seller–buyer relationship and, 36 and, 165–172, 166–167b,
undervaluation of goods. See 245–249
undervaluation of goods for key performance indicators, 74
valuation controls, 60–62 mirror analysis to detect fraud and, 43,
valuation rules, 8, 60, 60n47, 140b 43n19
Customs Valuation Agreement (VAL) of post-audit clearance and, 161
WTO, 60, 60n48, 121 for pre-arrival control, 152, 152f
transshipment and cargo
D traceability, 34
Daly, Michael, 33 data privacy and protection
dangerous goods, 16 breaches of, 212n13
data cloud computing and, 230, 230n39
analysis of. See data analytics data optimization and, 141
anonymization of, 214 laws on, 121, 212–213, 230, 230n41
cleansing process for, 166–167 data sharing
collection of. See data collection customs administration and, 26
dictionaries of, 141, 141n4 customs enforcement and, 181, 183,
entry accuracy for, 229, 231 218
leaks of, 213 customs–tax cooperation and, 79, 212,
linkage of, 167 242
optimization of, 140–141 customs-to-customs cooperation and,
privacy and. See data privacy and 62, 62n50, 80–82, 117
protection electronic data exchanges for, 205
quality of, 222 eTIR system and, 123
reconciliation of, 211–212 trade facilitation and, 121
sharing. See data sharing DCMM (Digital Customs Maturity
storage of, 214, 222–223, 226, Model), 205–206, 205n6, 206f
229–230 debt collection, 242
validation and verification of, 245 decision trees, 170, 257–259, 257t, 258f,
data analytics 259t
big data and, 153b, 213–214, declaration data, 14–15, 26, 140b
221–224, 224f Declaration of the Customs Co-operation
culture of, 178 Council (WCO), 101–102
defined, 222 de minimis value, 23, 38, 42
disruptive technologies and, 221–223 departmentalization, 208–209, 208n9
key performance indicators and, 74 descriptive analysis, 222
machine learning and, 223 developing countries
open data initiatives and, 218, 218n23 customs enforcement strategy example
risk management and, 190 for, 276–279
scanned image analytics and, 225–227 customs escort services and, 123
data collection data sharing and, 26
customs enforcement and, 186, 195, digitalization and, 25, 205, 205n4, 207
198b exempted goods in, 12
customs trends and, 26 import tariffs and, 47
digitalization and, 220 natural resources exports of, 14
disruptive technologies and, 221–223 post-clearance audits and, 107

©International Monetary Fund. Not for Redistribution

288 Customs Matters: Strengthening Customs Administration in a Changing World

developing countries (continued ) blockchain and, 231–232

risk management and compliance cloud computing and, 229–230
systems in, 126 data analytics and, 221–223
SEZs in, 57 defined, 218
tariff rates in, 54 features of, 218–219, 219t
trade costs in, 96 fragile states and, 220–221
Trade Facilitation Agreement of WTO robotic process automation and,
and, 13 228–229
trade facilitation in, 98, 111 scanned image analytics and, 225–227,
trade mispricing and tax revenue loss 226f
in, 52n30 tracking devices and, 227–228
value-added tax and, 8 dogs for contraband detection, 274
diagnostic analysis, 222 domestic legislation, 15
Digital Customs Maturity Model domestic tax collection, 8–9, 8–9f
(DCMM), 205–206, 205n6, 206f domestic transfer pricing, 52
digitalization, 3, 203–234 drug trafficking, 17, 17t, 23. See also
big data processing and, 213–214 illegal trafficking
customs clearance vs. back-end dry ports, 35
operations and, 211–212 dual-use goods, 19, 158
data privacy and protection, 212–213 DUCA (Single Central American
defined, 204n2 Customs Declaration), 120
digitization vs., 204–206, 206f, Duchesneau, Hubert, 67
214–215
disruptive technologies and, 218–233. E
See also disruptive technologies EA (enterprise architecture), 217
governance and financing of, 215–216 East African Community (EAC), 111,
ICT design and management issues, 228n37
214–215 e-commerce
management support for, 209–211 border security and, 225
opportunities and challenges provided as challenge for customs
by, 203–204 administration, 22–23, 36–39
organizational reform and data volume increases and, 221
modernization, 216–218 defined, 22n15
persistent manual procedures, revenue collection on, 38, 38n7
207–208, 208f value of, 22
revenue collection on e-commerce and, Economic and Monetary Community of
38, 38n7 Central Africa (CEMAC), 10
silo mentality and, 208–209 e-forms, 140b
trends in customs administration and, EFTA (European Free Trade Association),
25 120
Digital Maturity Model (Google), 205n6 Egmont Group, 159
direct authority, 188 e-invoice programs, 154
discretionary selection for inspections, electronic cargo tracking system (ECTS),
157b, 169 227–228, 227n34, 228n37
disruptive technologies, 218–232 electronic data exchanges, 205
applications of, 220 electronic documents, 25
artificial intelligence and, 223–225, El Salvador, administrative burden
224f reduction strategies in, 118
augmented and virtual reality, 232–233 emerging market economies

©International Monetary Fund. Not for Redistribution

 Index 289

customs enforcement powers in, 179, New Computerized Transit System,

180f 123
pre-arrival electronic data and, 152, Partnership and Co-operation
152f Agreements, 81
revenue collections in, 9, 9f undervaluation of imports and revenue
risk management application in, 133, loss, 61n49
134f European Union Customs Business
tariff averages in, 7, 7t Process Model (EU BPM), 115
tax administration data shared with excise taxes, 8, 44b, 46–47, 183, 228
customs, 162, 162f exempted goods, 12, 42, 56, 163–164,
TIN and e-signature use in, 151, 151f 164b. See also special economic zones
VAT collection in, 41 expert advice, 105–106
endangered species trade, 17–18, 122 expert examination and sampling of
end-use verification, 58 exports, 159
enforcement. See customs enforcement exports
enquiry points, 102–104, 104f integrated risk management and,
enterprise architecture (EA), 217 158–159
enterprise resource planning (ERP), 206, VAT refunds and, 42–43, 43n18, 51,
206n7, 209–211 183
environmental and health protection verification of, 43, 43n18
carbon taxes and, 15, 48–51 extractive industries, 159
climate change and, 15 Extractive Industries Transparency
excises and, 46 Initiative, 14n7
hazardous materials, 16
neglect of, revenue collection focus F
and, 242 face-vetting, 207
ozone-depleting substances, 15 facial recognition software, 224
quality standards and customs fairness provisions, 105
administration, 16 field operations, 194–195
e-signatures, 140b, 151, 151f Financial Intelligence Units (FIUs), 159
European Free Trade Association (EFTA), fines. See penalties and sanctions
120 foregone revenue, 12, 58, 164. See also
European Port Community Association, exempted goods
120 foreign direct investment (FDI), 56
European Union (EU). See also specific foreign trade statistics, 14–15
countries forged country of origin, 50, 55, 55n37,
candidate countries and border 146–147b, 197
controls, 55n36 fragile and conflict-affected states (FCS)
carbon border tax and, 48–49, 49n28 appeals processes and, 185
climate change and, 15 banking sectors of, 36
Customs Blueprints of, 235n1 customs enforcement and, 187
data privacy and protection laws in, customs importance in, 26–27, 27n19
212–213, 230, 230n41 disruptive technologies and, 220–221
e-commerce revenue collection in, 38, strengthening customs administration
38n9 in, 27b
Import Control System, 18 Framework of Principles and Practices on
Intellectual Property Office, 12 Customs Professionalism of WCO,
intra-RTA trade in, 10 88n11
joint border stations in, 182n7 France, digital services tax in, 24

©International Monetary Fund. Not for Redistribution

290 Customs Matters: Strengthening Customs Administration in a Changing World

fraud global risk indicator, 161n16

blockchain technology and, 231–232 Global Survey on Digital and Sustainable
carbon taxes and forged country of Trade Facilitation (UN), 97
origin, 50 global value chains (GVCs), 35, 40, 56
compliance management and, 62 goods/service mixtures, 39–40
Custom Mutual Assistance Agreements Google, 205n6
and, 121 government resource planning (GRP),
defined, 146, 146n5 210
digitalization and, 220 GPS (global positioning system), 123,
e-commerce and, 23 227–228
exempted goods and, 56, 164, 164b green channel. See also authorized
export VAT refunds and, 42–43, economic operators; trusted trader
43n18, 183 programs
forged country of origin and, 50, 55, compliance history and, 119
55n37, 146–147b, 197 customs enforcement and, 188
identity theft and, 151 fairness in cargo release, 105
integrated risk management and, 139, random checking of, 61
146 risk management systems and,
investigations of, 193, 267–268 127, 207
machine learning for, 223 gross domestic product (GDP)
mirror analysis to detect, 43 black-market size and, 45b
money laundering and, 12, 17, 52, informal market and, 45n20
154, 158 tax-to-GDP ratio and growth, 48,
penalties for, 263, 265t 48n27, 49f
prevention of. See customs enforcement Guatemala
risk cluster identification and, administrative burden reduction
170–172, 171f, 260–262 strategies in, 118
single-window platform initiatives and, customs-to-customs cooperation in,
116 117
Strategic Anti-Fraud Program guidance documents, 102–103
of WCO, 19 gun sales, 18
free trade areas, 10, 10nn2–3
free zones (FZs). See special economic H
zones Hammer, H., 214n14
functional authority, 188 harmonization of customs processes, 101,
113, 120–122
G Harmonized Commodity Description
gap analysis, 43 and Coding System “Harmonized
garbology, 44b System”, 14–15, 14n8, 29
Gemmell, Norman, 40n13 hazardous materials, 16
General Agreement on Tariffs and headquarters, role of, 84–85, 187–190
Trade (GATT), 12–13, 40, 216, health protection. See environmental and
216nn19–20 health protection
General Agreement on Trade in Services high-risk operators, 59, 99, 170, 170t,
(GATS), 40 190–191
Generalized System of Preferences (GSP), Hollingshead, Ann, 52n30
11, 53b, 53n32, 59n45 Holloway, Stephen, 138
global financial crisis (2008–10), 5–6 Honduras, modernization of customs
Global Risk Index (GRI), 169–171, 252 administration in, 71

©International Monetary Fund. Not for Redistribution

 Index 291

Hong Kong, manufacturing services interagency coordination for, 116–117

imports in, 40n12 nonintrusive and X-ray scanners, 119,
hub-and-spoke transport patterns, 34 186, 225–227, 225nn31–33, 226f,
human resources management, 87–89, 274–275
89–90b, 145b, 149b, 239–240. See risk management and, 133b, 157b, 169
also customs staff institutional risks, 143
human trafficking, 2, 19 intangibles, 39–40
Integrated Framework for Trade-Related
I Technical Assistance, 29
IDB (Inter-American Development integrated risk management (IRM), 3,
Bank), 123 131–173
identity theft, 151 cargo management and, 153–154,
illegal trafficking 154b
antismuggling teams for, 193–194, compliance history and, 168, 247–249t
266–267 compliance risks and, 146–147b
customs administration and, 16–18 customs clearance and, 155–156t,
data reconciliation and, 211–212 155–157, 156–157b
defined, 146, 146n6 customs core processes and, 132–137,
of drugs, 17, 17t 134f, 137–138f
e-commerce and, 23 customs enforcement and, 188
during emergencies, 98 customs processes analysis and, 150
of endangered species, 17–18, 122 data for treatment strategies and, 165
exports and, 158–159 data usage optimization and, 140–141,
fragile and conflict-affected states and, 165–172, 166–167b, 245–249
26 exports and, 158–159
of humans, 2, 19 indicator-based decision trees and, 170,
integrated risk management and, 139, 257–259, 257t, 258f, 259t
147b institutional and compliance risk, 143,
prevention of. See customs enforcement 144–145b
rip-off modality and, 147b, 147n8 knowledge of environment and, 139
smuggled on-person goods, 2, 44b myths vs. realities in, 133b
traceability and excises, 47 operational functioning and, 145–147,
Illicit Trade Report (WCO), 176 148–149b
IMF. See International Monetary Fund post-clearance audits and, 160–164,
import tariffs, 47–48, 48n26, 48t, 49f 162f, 163–164b
indirect taxes, 8 preventive focus of, 139, 140b
information and communications prior actions and, 150–152, 151–152f,
technologies (ICT). See 151–153b
digitalization; IT systems; risk cluster identification and,
technological improvements 170–172, 171f, 260–262
information sharing. See data sharing risk management committees and,
infrastructure, integrated risk 141–143, 142b
management and, 145b, 149b segmentation and assessment of
inspections. See also selectivity criteria operators and, 168–169, 169–170t,
AR and VR for, 232 250–251t, 250–253, 253f, 253t
contraband detection technologies for, sensitive goods identification and,
186, 192, 274–275 169–170, 170t, 254–255, 254–256t
expert examination and sampling of strategic vision for, 138, 139b
exports, 159 technology adoption and, 140

©International Monetary Fund. Not for Redistribution

292 Customs Matters: Strengthening Customs Administration in a Changing World

integrity management framework, 90–91, International Survey on Customs

91b, 101, 240 Administrations (ISOCA)
intellectual property, 12, 16, 147b on customs enforcement powers, 179,
intelligence gathering, 19, 189–190, 195, 180f
268–270 defined, 133n2
interagency risk management, 191–192 on electronic data from tax
Inter-American Development Bank administrations, 162, 162f
(IDB), 123 on mandatory pre-arrival electronic
inter-modalism, 225, 225n30 data, 152f
International Convention on Mutual on risk management trends, 133, 134f
Administrative Assistance in Customs on use of TIN and e-signatures, 151f
Matters (WCO), 181, 181n6 international trade growth, 5–7, 6f
international cooperation for customs international trade patterns, 21–23
enforcement, 181–182 international travel
International Goods in Transit (TIM), 123 cross-border shopping and, 42, 42n17
international institutions, 27–28. See also human trafficking and, 2, 19
specific institutions personal items of travelers, 2, 38n8, 42,
internationally accepted definitions, 42n17, 44b
weights, and measures, 121 Interpol, 18
International Maritime Organization, 77 intra-firm trade, 35–36
International Monetary Fund (IMF) inventory management, 22
COVID-19 pandemic and continuity investigations. See criminal investigations
planning, 92 and prosecutions
COVID-19 pandemic and trade inward processing, 56, 58
facilitation, 99 IRM. See integrated risk management
on customs–tax cooperation, 26n18, 241 ISOCA. See International Survey on
fragile and conflict-affected states and, Customs Administrations
27 ISORA (International Survey of Revenue
international trade growth and, 27–28 Administrations), 78, 78n5
regional capacity development centers IT systems
and training programs, 2, 28–29, for cargo targeting, 152
28n20, 28t, 29n21 for cargo traceability, 153, 154b
on special economic zones, 12n4 customs enforcement and, 192–193
VAT, promotion of, 40 digitalization and silo mentality, 209
international standards. See also Trade fragile states and, 220–221
Facilitation Agreement as operational functioning weakness,
coordinated border management and, 149b
76–77 post-clearance audits and, 163b
customs enforcement and, 187 risk management and, 144b
customs modernization and, 99 selectivity rates and, 155–156,
data models and, 166n18 155–156t
for e-commerce, 23 software for administrative burden
to enable legal and regulatory reduction, 119, 204n3, 205n4
frameworks, 86
harmonization and, 101, 121–122 J
importance of, 25–27, 26b Japan
trade facilitation and, 101–102 Great East Japan Earthquake, 21–22
International Survey of Revenue Japan-Australia Economic Partnership
Administrations (ISORA), 78, 78n5 Agreement, 55n37

©International Monetary Fund. Not for Redistribution

 Index 293

scanned image analytics LeDrew, William, 175

in, 225n32 legal and regulatory frameworks. See also
Johannesburg Convention (WCO), 181, trade and tax policies
181n6 appeals processes and, 184
joint border controls, 124 cloud computing and, 230
joint border stations, 57, 182, 182n7 customs enforcement and, 179, 180f,
joint forces operations (JFOs), 181, 213
181n5, 195 customs programs and, 86
Jordan data privacy and protection, 212–213
enterprise resource planning in, 206n7 enabling, 86–87
SEZ in, 57n39 integrated risk management and, 144b,
just-in-case inventory management, 22 148b, 157b
just-in-time inventory management, 22 post-audit clearances and, 161
for protection and security, 15–16
K regional transit of goods and, 123
Keen, Michael, 7 simplification of trade formalities and,
key performance indicators (KPIs) 113–114
customs clearance, 236–237 letters of credit (LCs), 36, 37b, 62
enforcement, 239 line authority, 188
examples, 235–240 low-income countries
human resource management, customs enforcement powers in, 179,
239–240 180f
integrity, 240 customs revenue collection in, 47–48,
modernization of customs 135
administration and, 73–75 pre-arrival electronic data and, 152,
revenue collection, 235–236 152f
risk management and compliance, revenue collections in, 9, 9f
237–238 risk management application in, 133,
Kidd, Maureen, 241 134f
K9 units, 274 tariff averages in, 7, 7t
Koh, Jonathan, 203 tax administration data shared with
Kokoli, Robert, 47n25 customs, 162, 162f
TIN and e-signature use
L in, 151, 151f
landlocked countries, 20, 35, 98, 111 user fees in, 216
Laos, customs enforcement in, 176, value-added tax and, 8–9, 41, 41n15
176n1
law enforcement agencies, 179, 182, 195, M
269 machine learning (ML), 223, 224f,
LCs (letters of credit), 36, 37b, 62 226–227
leadership and management development, Madagascar, modernization of customs
89 administration in, 71
leased goods, 21, 39 Mann, Arthur J., 183
least developed countries manual procedures, 74, 141, 204–205,
defined, 13n6 207–208, 208f
tariff rates in, 53b, 54 manufacturing processes, 40
Trade Facilitation Agreement of WTO marine patrol units, 195, 272–273
and, 13 marine pollution, 15
trade facilitation and, 95, 95n1, 98 market intelligence, 44b

©International Monetary Fund. Not for Redistribution

294 Customs Matters: Strengthening Customs Administration in a Changing World

market price and valuation rules, 60–61, monopolies, 216, 228n36

60n47 Montagnat-Rentier, Gilles, 5
market research, 44b Montreal Protocol (1987), 15
Matsudaira, Tadatsugu, 33, 203 Mordor Intelligence, 23n16
memoranda of understanding (MOUs), Morozumi, Atsuyoshi, 41n16
78, 121, 181, 192, 195 most favored nation (MFN) status, 47,
MERCOSUR (Southern Common 53–54, 216n20
Market), 10, 124 MOUs (memoranda of understanding),
Mexico 78, 121, 181, 192, 195
e-invoice program in, 154 multilateral trading system, 52–54, 53b
United States, customs cooperation multinational enterprises (MNEs), 52
with, 82 mutual recognition agreements, 111–112,
MFN (most favored nation) status, 47, 124
53–54, 216n20 Myanmar, customs enforcement in, 176,
migration. See human trafficking; 176n1
international travel
minimum price database, 60–61 N
mirror analysis of trade statistics, 43, 45b NAFTA (North American Free Trade
misclassifications. See cargo Agreement), 10, 82
misclassifications and Nagy, János, 67, 175
undervaluations national security, 18–19, 19n12, 225
mission statements, 72, 72b national targeting centers (NTCs),
mixed goods, 39–40 190–191, 190n12
ML (machine learning), 223, 224f, national trade facilitation committees
226–227 (NTFCs), 104, 109, 125–126
MNEs (multinational enterprises), 52 natural resources, 56, 159
mobile phones, 39–40 Netherlands
Model Bilateral Agreement on Mutual scanned image analytics in, 225n32
Assistance in Customs Matters VR use in customs training, 233n46
(WCO), 181 network analysis, 153b
modernization of customs administration. New Zealand, integrated risk
See also digitalization; IT systems; management in, 136–137
technological improvements Nigeria, closure of land borders in, 24
barriers to, 214–215 non-tariff barriers, 61, 122
customs clearance and, 155–156 non-tariff measures (NTMs), 53b
customs leadership and ownership of, non-tariff regulations, 147b
68–69 nuclear non-proliferation, 158
integrated risk management and,
140–141 O
international institutions and, 29 one-stop border posts (OSBPs), 57, 182,
organizational reform and, 216–218 182n7
political commitment and, 67 open data initiatives, 218, 218n23
risk management and compliance operational performance management
systems, 126–127 systems (OPMS), 189, 189n11,
success factors in management of, 69b 199–201, 200b
technological improvements and, Organisation for Economic Co-operation
216–218 and Development (OECD), 12, 113
urgency of, 1–2 organizational culture, 178
money laundering, 12, 17, 52, 154, 158 organizational structure for customs

©International Monetary Fund. Not for Redistribution

 Index 295

digitalization and reform of, 216–218 performance reporting, 74

examples, 243–244 personal use goods, 2, 38, 38n8, 42,
field operations, 85 42n17, 44b
functional direction and point-to-point transport patterns, 34
management, 84 political commitment to customs
government apparatus and, 83–84 administration, 67–68. See also legal
headquarters, 84–85 and regulatory frameworks
overview, 82 Pomerleau, Shuting, 49n28
principles of, 83b Port Community Systems (PCS), 120
professional support services, 85–86 port congestion, 34–35
organized crime, 19, 78, 158–159 post-clearance audits (PCAs)
origin rules advance rulings and, 106
carbon taxes and, 50 authorized economic operator
certificate authenticity and, 231 applications and, 111
consignment criteria, 59n46 customs enforcement and, 193–194,
forgeries of origin, 50, 55, 55n37, 270–272
146–147b, 197 customs–tax cooperation and, 78
preferential, 10–11 defined, 106
RTAs and, 54–55, 54nn34–35 exports and risk management, 159
secondhand goods and, 39 integrated risk management and, 141,
self-declarations, 55, 55n37 160–164, 162f, 163–164b
SEZs and, 59, 59n45 modernization of customs procedures
third-party certificates for, 50, 55 and, 68
traceability and, 50–51 trade facilitation and, 106–107
OSBPs (one-stop border posts), 57, 182, valuation controls and, 61
182n7 PPPs (public-private partnerships),
outlet store surveys, 44b 215–216, 215n18, 228
overvaluation of goods, 146b, 183n8 pre-arrival clearance protocols,
119–120, 150–152, 151–152f,
P 152–153b
Panamax-size ships, 34 predictive analysis, 222
pandemic. See COVID-19 pandemic prescriptive analysis, 222
PCAs. See post-clearance audits prior actions, 150–152, 151–152f,
PCS (Port Community Systems), 120 151–153b
penalties and sanctions privacy. See data privacy and protection
appeals processes for, 69, 105–106, private sector, 80, 133b. See also public-
112–113, 184–185 private partnerships
customs enforcement support and, 184 Private Sector Consultative Group
as deterrent to noncompliance, 62, (PSCG), 80
141, 150 profit shifting, 36, 52, 59, 183n8
legal framework for, 114–115 prohibited or restricted goods. See illegal
sample graduated regime for, 263, trafficking
264–265t protectionism, 7, 21–22, 24, 40
self-declaration of errors and waiver publications for trade community,
of, 110 102–105, 103t, 104f
pension programs, 78n6 public-private partnerships (PPPs),
Pérez Azcárraga, Augusto Azael, 131 215–216, 215n18, 228
performance management, 74–75, 241. push- and pull-type data exchange, 62,
See also key performance indicators 62n50

©International Monetary Fund. Not for Redistribution

296 Customs Matters: Strengthening Customs Administration in a Changing World

R customs intelligence capacity and,

radio-frequency identification (RFID) 268–270
technology, 123–124, 227–228 customs–tax cooperation and,
random selection and inspection, 157b 182–183, 242
raw materials, 56, 159 digitalization and, 211, 218
recourse, 112–113. See also appeals key performance indicators for,
processes 237–238
red-tape reduction strategies, 117–120, modernization of customs
118b administration and, 70–71, 126–127
reform of customs administration. physical inspections and, 105
See modernization of customs segmentation and assessment of
administration operators and, 253, 254f
regional capacity development centers single-window platform initiatives and,
(RCDCs), 28–29, 28n20, 28t, 115
29n21 transit diversion risks and, 35, 42, 227
regional trade agreements (RTAs) valuation controls and, 61
customs administration and, 54–55, VAT exemption and diversion risk, 42
54nn34–35 risk management committees (RMCs),
defined, 10 141–143, 142b, 189
goods origin and carbon taxes, 50 risk profiling, 151, 156b, 156n12
increase in, 10 RKC (Revised Kyoto Convention), 29,
modernization programs and, 67 86, 97, 112, 121, 187
preferential origin status and, 15n9 robotic process automation (RPA),
SEZs and, 59n45 228–229, 228n38
regional transit of goods, 122–124 Rotterdam Convention, 15
resale of secondhand goods, 39 RTAs. See regional trade agreements
revenue collection key performance rules of origin. See origin rules
indicators, 235–236
revenue leakage, 42, 164b S
Revised Arusha Declaration Concerning SAD (Single Administrative Document),
Good Governance and Integrity in 120
Customs (WCO, 2003), 91 SAFE Framework of Standards, 18–19,
Revised Kyoto Convention (RKC), 29, 110, 112, 121
86, 97, 112, 121, 187 sampling of goods, 159
RFID (radio-frequency identification) sanctions. See penalties and sanctions
technology, 123–124, 227–228 San Juan, Rossana, 131
rip-off modality, 147b, 147n8 scanned image analytics, 225–227, 226f
risk cluster identification, 170–172, 171f, SDGs (Sustainable Development Goals),
260–262 1
risk management. See also integrated risk SDV (source data verification), 217–218
management sea transport, 34–35, 195, 272–273
administrative burden reduction and, secondhand items, 39
119–120 sectoral studies in audit planning, 163b
border management and, 77 security. See also data privacy and
contraband detection technologies protection; illegal trafficking
and, 274 cross-border crime and, 19
customs enforcement and, 178, customs cooperative arrangements for,
178n2, 183, 186, 189–193, 76–77
197, 198b customs–tax cooperation and, 242

©International Monetary Fund. Not for Redistribution

 Index 297

European Union and external border Single Administrative Document (SAD),

controls, 55n36 120
intelligence gathering and, 19 Single Central American Customs
international travel and, 2 Declaration (DUCA), 120
national security and counterterrorism, single-window platform initiatives
18–19, 19n12, 225 coordinated border management and,
standards and regulations application, 76–77
15–16 customs enforcement and, 190
segmentation methodology for economic customs–tax cooperation and, 212
operators, 168–170, 169–170t, political support and, 68
250–253, 250–251t, 253f, 253t risk management and, 140b, 178
selectivity criteria trade facilitation and, 115–116
carbon border taxes and, 50 slowbalization, 21–22
customs clearance modernization and, small and medium enterprises (SMEs),
155, 155–156t, 156–157b 111
decision trees for, 170 Small Arms and Light Weapons
risk management and, 61, 132, 133b, Project, 18
141 small value/expedited shipments, 36–39.
segmentation and assessment See also e-commerce
methodology, 169 smuggled goods. See illegal trafficking
silo mentality and, 211, 211n11 social network monitoring, 17
valuation pre-declarations and, 208 social security programs, 78n6
VAT and, 42 Software Engineering Institute, 205n6
self-declarations software for administrative burden
of errors, 110 reduction, 119, 204n3, 205n4
of origin, 55, 55n37 source data verification (SDV), 217–218
sensitive goods identification, 157b, Southern Common Market
157n13, 169–170, 170t, 254–255, (MERCOSUR), 10, 124
254–256t Spain, customs–tax cooperation in, 78
service sector, 21, 39–41 special economic zones (SEZs)
Seychelles, business continuity planning challenges for customs administration,
in, 92–93 57–60
SEZs. See special economic zones domestic transfer pricing and, 52
sharing economy, 21 export VAT refunds and, 43
silo mentality, 208–209, 208n9, 211 increase in, 12
simplification of customs processes, tax preferences and, 56–57, 57n38
113–122 transshipment and processing, 34
administrative burden reduction and, special purpose vehicles (SPVs), 215,
117–120, 118b 215n16
harmonization and standardization, staff. See customs staff; training of
101, 113, 120–122 customs staff
interagency inspections and, 116–117 standard international codes, 166n18
legal framework for, 113–114 standardization of customs processes,
regional transit of goods 101–102, 120–121, 124. See also
and, 122–124 international standards
single-window platform initiatives and, standard operating procedures (SOPs),
115–116 161
trade facilitation and, 100 Stockholm Convention, 15
trade formalities and, 113 strategic planning, 70–73, 72b, 138, 139b

©International Monetary Fund. Not for Redistribution

298 Customs Matters: Strengthening Customs Administration in a Changing World

strengths, weaknesses, opportunities, and administrative burden reduction

threats (SWOT) analyses, 70 strategies and, 118–119
subscription business models, 39–40, cargo traceability and, 154b
39n11 contraband detection technologies,
subsidies, 48–49, 51 186, 192, 274–275
supply chains customs enforcement and, 186,
continuity planning and, 92 192–193, 201
digital monitoring of, 25 disruptive technologies and. See
disruption risks to, 21–22 disruptive technologies
intra-firm trade and, 35 guidance documents, accessing, 102,
third-party certificates of origin and, 50 104–105
Sustainable Development Goals inspection services and, 119
(SDGs), 1 integrated risk management and, 140
simplification of customs processes
T and, 113–114
tariffs single-window platform initiatives and,
classification slippage, 42, 50, 146b 115–116
on imports, 47–48, 47n23, 48n26, terrorism, 18–19, 158, 225
48t, 49f TFSP (Trade Facilitation Support
multilateral trading system and, 52–54, Program), 126
53b theft of goods, 228
as revenue source, 7–8, 7t third-party certificates of origin, 50, 55
task forces, 181, 181n5 threat assessments, 198–199b
tax administration. See also customs–tax 3D printing, 23, 23n16, 40
cooperation; trade and tax policies; TIM (International Goods in Transit),
value-added tax 123
carbon taxation and, 15 TINs (taxpayer identification numbers),
cooperative arrangements for, 77–79, 150–151, 151f, 154, 182–183
241–242 TIR Convention (Customs Convention
corporate income tax and, 36, 52, 59, on International Transport of Goods
183n8 Under Cover of TIR Carnets, 1975),
domestic tax collection and customs, 122
8–9, 8–9f TiVA (trade in value added), 51
indirect taxes, 8 tokenization, 219n24, 219t
machine learning for fraud detection, TPP (Trans-Pacific Partnership), 55n37
223 traceability. See cargo traceability
sustainable development and, 1 tracking devices, 123, 227–228
tax-to-GDP ratio and growth, 48, trade agreements, 22, 81–82. See also
48n27, 49f regional trade agreements; specific
withholding taxes and, 41, 41n14, agreements by name
48n26 trade and tax policies, 2, 33–65
tax evasion, 43, 44b, 59, 98 carbon border tax and, 48–51
taxpayer identification numbers (TINs), customs–tax cooperation and, 51–52
150–151, 151f, 154, 182–183 excises and, 46–47
technical barriers to trade (TBT), 122 implementation of, 10–11, 11t
Technical Barriers to Trade Agreement import tariffs, 47–48, 48t, 49f
(WTO), 122 inward processing and, 56
technological improvements. See also multilateral trading system and, 52–54,
digitalization 53b

©International Monetary Fund. Not for Redistribution

 Index 299

regional trade agreements and, 54–55 comment time for new laws, 115
special economic zones and, 56–60 customs brokers’ role, 105
trade patterns and, 35–40, 37b developing countries and, 13
transport patterns and, 33–35 formalities and documentation
valuation controls and, 60–62 requirements of, 118b
valuation rules and, 60 guidance documents, availability of,
value-added tax and, 40–46, 46f 102
trade barriers, 21, 21n14, 95–96, 113, on guidance documents, availability
116. See also CITES of, 103t
non-tariff barriers, 61, 122 modernization of customs
WTO Technical Barriers to Trade administration and, 68
Agreement, 122 private sector consultations, 80
trade defensive measures, 13–14 regulatory framework, 86
trade facilitation, 3, 95–129 single-window platform initiatives, 115
authorized economic operator status of, 97–100, 98f
programs and, 109–112 training on, 29
challenges of, 2 trusted trader programs, 110
coordinated interagency inspections WTO members and, 24b
and, 116–117 Trade Facilitation Agreement Facility
customs administration and, 12–13 (WTO), 98
defined, 53b, 96, 99 Trade Facilitation Support Program
expert advice, access to, 105–106 (TFSP), 126
fairness provisions and, 105 trade financing, 36, 37b, 62
harmonization and standardization, trade formalities simplification, 113–114
120–124 trade in value added (TiVA), 51
legal framework and, 114–115 trade liberalization, 7, 28, 52, 54, 63
as non-revenue function of customs, trade patterns, 21–23, 35–40
242 data used to identify, 26, 221–223,
overview, 96, 96f 224f
pillars of, 100–102 integrated risk management and, 136
post-clearance audit and, 106–107 risk management and, 61
publications for traders, 102–105, Trade-Related Aspects of Intellectual
103t, 104f Property Rights (TRIPS), 16
recourse, access to, 112–113 trafficking. See illegal trafficking
red tape and administrative burden training of customs staff
reduction, 117–120, 118b antismuggling teams and, 266
regional transit of goods and, 122–124 in cargo release, 157b
roadmap for, 125–127 in cargo targeting, 153b
single-window platform initiatives, in customs enforcement, 185–186
115–116 in customs intelligence, 269
stakeholder engagement and, 107–109, in data science, 222
108f in fraud investigations, 268
trade formalities, simplification of, human resources management and,
113–114 88–89
WTO trade facilitation agreement and, marine patrols and, 273
97–100, 98f in post-clearance audits, 161, 271
Trade Facilitation Agreement (WTO) simulations for, 232–233, 233n46
appeals processes, 112 in software programs, 119
ascension into, 125–126 from WCO, 29, 153n10

©International Monetary Fund. Not for Redistribution

300 Customs Matters: Strengthening Customs Administration in a Changing World

training of trade community, 104. See also United Nations Environment Program,
publications for trade community 15
transactional data, 212, 212n12 United Nations International Convention
transfer pricing, 36, 52, 59, 183 on the Harmonization of Frontier
transit corridors, 123 Control of Goods, 77
transit diversion risks, 35, 42, 227 United Nations Office on Drugs and
Trans-Pacific Partnership (TPP), 55n37 Crime (UNODC), 17, 158
transparency United Nations Trade Data Elements
appeal mechanisms and, 112–113, Directory (UNTDED), 166n18
184–185 United States
legal framework for customs carbon border tax and, 48
administration and, 87 China, trade tensions with, 23–24
of penalty and sanction regime, 263 Container Security Initiative, 18
published customs procedures for, 102, counterterrorism, 18
104 Mexico, customs cooperation
trade facilitation and, 100–102, 122 with, 82
transport patterns, 33–35 user fees, 215–216, 216nn19–20
TRIPS (Trade-Related Aspects of
Intellectual Property Rights), 16 V
trusted trader programs (TTPs), 68, valuation. See customs valuation
109–112, 188, 194 valuation controls, 60–62
valuation rules, 8, 60, 60n47, 140b
U value-added tax (VAT)
undeclared goods, 2, 44b, 171, 192 customs administration and, 41–46,
undervaluation of goods. See also 41n16, 46f
cargo misclassifications and customs enforcement and, 183
undervaluations customs–tax cooperation and, 40–46,
artificial intelligence and, 223 46f, 52, 52n29
compliance risk and, 146b evasion of, 43, 44–45b
customs enforcement and, 197 import tariffs and, 47–48, 47n23,
risk management and, 171 48n26
VAT taxes and, 45, 61n49, 183n8 increase in use of, 8–9, 8f
unemployment, 21 revenue collection from, 9, 9f
unilateralism, 24 revenue collection on e-commerce and,
United Nations 38
Global Survey on Digital and tax policy evolution and, 40–41
Sustainable Trade Facilitation, 97 valuation controls and, 61, 61n49
Trade Facilitation Implementation value chains, 21–22, 21n13, 35, 40, 51
Guide, 100 value statements, 72, 72b
United Nations Centre for Trade virtual reality (VR), 232–233, 233n46
Facilitation and Electronic Business vision statements, 72, 72b
(UN/CEFACT), 99
United Nations Conference on Trade and W
Development (UNCTAD), 10, 97, Washington Convention, 17–18, 122
99, 99n5, 118, 204n3 weapons, 18, 19, 158
United Nations Economic and Social Weerth, Carsten, 62n51
Council, 95n1 wholesale store surveys, 44b
United Nations Economic Commission Widdowson, David, 138
for Europe (UNECE), 99, 122 withholding taxes, 41, 41n14, 48n26

©International Monetary Fund. Not for Redistribution

 Index 301

World Bank revenue collection on e-commerce and,

modernization of customs 38, 38n7
administration and, 29 Revised Arusha Declaration Concerning
trade facilitation and, 97 Good Governance and Integrity in
user fee schedule of, 216 Customs, 91
World Poverty Overview, 1 Revised Kyoto Convention, 29, 86, 97,
World Bank Group (WBG), 99, 126 112, 121, 187
World Customs Organization (WCO) SAFE Framework of Standards, 18–19,
AEO Compendium of, 112 110, 112, 121
Arusha Declaration on Integrity in Small Arms and Light Weapons
Customs, 80, 101–102 Project, 18
BACUDA (BAnd of CUstoms Data Strategic Anti-Fraud Program, 19
Analysts), 222n27 World Poverty Overview
border security and, 225 (World Bank), 1
Container Control Programme of, 17 World Trade Organization (WTO). See
Cross-Border E-Commerce Framework also Trade Facilitation Agreement
of Standards of, 23 Agreement on Customs
customs enforcement programs of, Valuation, 24b
18n11 Agreement on Rules of Origin, 24b
Customs Financial Intelligence Agreement on Trade-Related
Cooperation Handbook, 159 Aspects of Intellectual Property
Customs Valuation Agreement, 60, Rights, 16
60n48, 121 Customs Valuation Agreement, 60,
data model of, 166–167, 166n18 60n48
Declaration of the Customs Co- Data Model of, 14
operation Council, 101–102 e-commerce and, 23
Digital Customs Maturity Model, functions and contributions of, 24b
205–206, 205n6, 206f GATT review, 13
foreign trade statistics and, 14 modernization of customs
Framework of Principles and Practices administration and, 29, 29n22
on Customs Professionalism, 88n11 multilateral trading system and tariffs,
functions and contributions of, 24b 52–54, 53b
Harmonized System of, 14–15, regional trade agreements authorization
14n8, 29 and, 10
Illicit Trade Report, 176 Technical Barriers to Trade Agreement,
information exchanges between 122
members of, 121 trade defensive measures of, 13–14
on intangibles, 39 use fees and, 216, 216n19
International Convention on Mutual valuation rules and, 8
Administrative Assistance in
Customs Matters, 181, 181n6 X
on location of customs administration X-ray scanners, 119, 186, 225–227,
within government, 83n10 225nn31–33, 226f, 274–275
Model Bilateral Agreement on Mutual
Assistance in Customs Matters, 181 Z
Model CMAA, 62n51 Zambia, risk management policy in,
modernization initiatives, 29 178n2
Private Sector Consultative Group Zimbabwe, authorized economic operator
of, 80 program in, 111

©International Monetary Fund. Not for Redistribution