Intervention by exception: A study of the use of risk management by customs authorities in the international trading environment

In recent years the international trading environment has been transformed dramatically in terms of the manner in which goods are carried and traded, the speed of such transactions and the sheer volume of goods that are now being traded around the globe. This, together with mounting pressure from the international trading community to minimise government intervention, has caused customs authorities to place an increasing emphasis on the facilitation of trade. In an effort to achieve an appropriate balance between trade facilitation and regulatory control, customs administrations are generally abandoning their traditional, routine ‘gateway’ checks and are now applying the principles of risk management with varying degrees of sophistication and success.

Experts agree that the means of achieving the desired balance between trade facilitation and regulatory control is through the use of risk management and, while the current body of knowledge provides the basis for formulating general principles of compliance management, there remains a need to determine whether the effectiveness of risk management strategies is contingent upon the operational context in which they are applied.

To this end, the study progresses beyond the conventional views that pervade the literature by examining specific risk management strategies in particular operational settings, such as an international airport, container port facilities, landing sites, road borders and international rail links. This is achieved through the use of a multi-faceted case study and the development of a conceptual framework against which a comparative analysis is conducted, including a model which provides a conceptualisation of the emphatic interrelationship between facilitation, regulatory control and risk management. Whilst the literature implies such a relationship, no conceptual model has hitherto been developed.

International comparisons, against which the issues identified in the case study are benchmarked, comprise the United States Customs Service, Australian Customs Service, South African Revenue Service and the World Customs Organization, which plays a prominent role in establishing international customs policy and practice.

Hong Kong has been selected as the subject of the case study as it provides an appreciable, broad-ranging insight into a diverse range of operational environments in which customs authorities are required to carry out their administrative responsibilities. These range from a very modern, highly secure, world-class international airport, through to a large number of relatively remote, unpatrolled makeshift landing sites for small vessels. The operational environments in which the issues are examined are grouped according to the various types of cargo that are subject to customs control. These comprise air, sea, river, road, rail, multi-modal and warehoused cargo.

The study supports the broad body of knowledge that identifies risk management as the means by which regulatory agencies may achieve an appropriate balance between facilitation and regulatory control. It further demonstrates that, while the principles of risk management provide customs authorities with a valid construction for compliance management, irrespective of the operational context in which they are applied, the effectiveness of risk-management strategies is contingent upon the particular operational setting.

Factors that are found to influence the effectiveness of such strategies include a range of information technology issues, such as the level of IT maturity/technological capability of both government and the private sector and the level of sophistication of commercial supply chains. Other influencing factors include various commercial imperatives and constraints, including the wide-ranging commercial lead-times for consignment data, the time-sensitivity of certain classes of cargo, the commercial availability of pre-arrival cargo data and the heterogeneity of particular industry sectors. Physical factors are also found to influence the effectiveness of risk-managed compliance strategies, including the geographic features of the country, the physical infrastructure at points of importation, exportation, storage and transit, and the security of facilities at points of importation, exportation, storage and transit. Finally, the study identifies a number of sociological, cultural and political factors that influence the effectiveness of such strategies, including public views and expectations about acceptable levels of facilitation and customs intervention, the broader regulatory framework governing particular industry sectors and the level, form and degree of acceptance of official corruption.

The study furthers the constructs of risk management theory by way of its empirical application in the context of regulatory compliance management, and its more specific application to customs compliance management in the international trade environment. In addition, the study serves to advance the body of knowledge of risk management theory through its introduction of a contingency perspective, which is demonstrated by reference to a variety of operational settings.

The conceptual model introduced by the study provides a logical framework that demonstrates how the various risk management strategies identified in the literature, including both enforcement and non-enforcement strategies, may be used to effectively manage compliance. It also provides a practical construct for examining and analysing an organisation’s style of compliance management.