Toward Risk-based Compliance Management: A case of Cambodia General
                    Department of Customs and Excise

...
The current report has three objectives. First, it introduces the elements of risk-based
compliance management. Second, it...
Source: Widdowson, 2004

The legislative base is an important element for any compliance management model.
This is because...
clear administrative guidelines and public information. Examples of client service
strategies from the Australian Customs ...
is used as the factor to determine physical inspection. It can be reasonably assumed
that risk level is not the factor sin...
Facilitate Trade through Risk Management’ (p. 23). This infers that any method used
will be varied and according to the ri...
In the context of the CED, the methods of enforcement used are depending on the
nature of the offence. Under Cambodia law ...
are, however, evidences of the traditional ‘gate keeper’ regulatory compliance model.
Nevertheless, aspects of the risk-ba...
Reference

AusCustoms               (Australian             Customs               Services):
http://www.customs.gov.au/sit...
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Risk Based Compliance Management: A Case Of Cambodia General Department Of Customs And Excise

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Risk Based Compliance Management: A Case Of Cambodia General Department Of Customs And Excise

  1. 1. Toward Risk-based Compliance Management: A case of Cambodia General Department of Customs and Excise by Dr. Cheaseth Seng Official in Cabinet of H.E. Deputy Prime Minister, Minister in charge of Council of Ministers Kingdom of Cambodia Associate Dean, Faculty of Business and Economics Pannasatra University of Cambodia 1. Introduction The Kingdom of Cambodia acceded to the World Trade Organisation (WTO) as the 148th member in 2004 (WTO Website). The Royal Government of Cambodia (RGC), in meeting its obligations under the WTO and attracting investors and improve its trade competitiveness has devised a twelve-points plan to improve its investment climate and trade facilitation. The twelve-points plan with contribution from the World Bank includes, inter alia, the use of Single Administrative Document and Single Window (SAD) process and the use of risk management strategy to manage import and export operations. The plan was also included in the RGC’s 2004 Rectangular Strategy. The Strategy provided that in the area of Customs operations, the Ministry of Economy and Finance (ministry in-charge of Customs) should “… implement forceful strategies and risk management principles to reduce smuggling and illegal activities along borders” (p. 2, Consulting Service Report). In addition, a leadership team has been setup to take charge of the move; with Senior Minister and Minister of Commerce… the Chairman of the Sub- Steering Committee of Trade Facilitation…must take a leading role to coordinate with relevant ministries-agencies, development partners and private sector to prepare a “Risk management Strategy” for import and export inspections….(p. 2, Consulting Service Report) In line with the adoption of risk management strategy for import and export inspections, the General Department of Customs and Excise (CED) is expected to implement a risk-based approach toward compliance management as well. A risk- based compliance management is a compliance management style that ‘draws together various elements of risk management [strategy]… to provide a structured approach to the management of compliance’ (p. 94, Widdowson, 2004). In addition, cooperation of the commercial sector is required. As pointed out by the former Secretary-General of the World Customs Organisation (WCO), this type of compliance management is the method that currently embraces by Customs authorities worldwide and commonly analogised as the ‘policeman’ method (Murray, 2009). 1
  2. 2. The current report has three objectives. First, it introduces the elements of risk-based compliance management. Second, it analyses the risk-based compliance management taken or currently taking by the CED. The analysis involves mapping the various elements of the compliance management to the current development taken by the CED. Lastly, a summary of CED’s current status of conformance with risk-based approach and its shortcoming is given. The next section of the report provides the elements of risk-based compliance management and CED’s compliance management situation. The last section provides a summary of the CED’s current development of its risk-based compliance management and conclusion remarks. 2. Risk-based Compliance Management and the CED The risk-based compliance management model selected to conduct the analysis on CED approach to risk-based compliance management is a model that adopted by the Centre for Customs and Excised Studies, University of Canberra (Widdowson, 2004; Murray, 2009). The model has four elements, namely legislative base, client service, compliance assessment and enforcement/recognition. Figure 1 depicts this risk-based compliance management pyramid. Figure 1: Risk-based Compliance Management Pyramid 2
  3. 3. Source: Widdowson, 2004 The legislative base is an important element for any compliance management model. This is because legislations provide ‘the necessary basis in law for the achievement of the range of administrative and risk management strategies which the administration has chosen to adopt’ (p. 44, Murray, 2009). In other words, it is the factor that enables the administration to choose objectives to meet and gives the power to carry out necessary tasks to meet the chosen objectives. To ensure effectiveness, legislations need to reflect all stakeholders’ interests and overall government policy. The risk- based compliance model thus needs to have a legislative framework that reflects the risk management strategy taken by the administration. The RGC has developed two pieces of legislation to enable the CED to carry out its risk management strategy and risk-based compliance management. The RGC has revised the Law on Customs (2007) and issued a sub-decree on “The Facilitation of Trade Through Risk Management”. The new Customs law provides the Ministry of Economy and Finance (MEF) discretions in determining the manner, documentation requirements and timing regarding to inspection and clearance of imported goods (Article 10). The MEF also has flexibility on goods declaration procedures (Article 30). These flexibilities give the MEF and in turn the CED to move from their current compliance management method to the risk-based approach. For example, the CED, under Article 10, can have reporting methods setup to cater for complier and non- complier. The sub-decree on “Trade Facilitation through Risk Management” provides a very strong base for the CED to engage in risk-based compliance management. The sub-decree provides principles for a risk-based operating procedures, administrative procedures and inter-agency arrangements. It was developed in consultation with all import and export related ministries and agencies, namely the Ministry of Commerce (MOC), Ministry of Industry, Mines and Energy (MIME), Ministry of Health (MOH), Ministry of Agriculture, Forestry and Fisheries (MAFF), General Department of Cambodian Import Export Inspection and Fraud Repression (Camcontrol) and other specialised bodies. In addition, through a workshop provided by AuAID/CATAF, private sector such as Chamber of Commerce of Phnom Penh, Garment Manufacturing Association in Cambodia (GMAC) and the Cambodian Forwarder Association were involved and informed about the risk management approach to import and export operations (Consulting Service Report). The legislations also serve government objectives, particularly the trade facilitation and improve investment climate objectives. Thus, the legal framework that enables the CED to engage in risk- based compliance management is well developed and endorsed by all relevant parties. Prior to the issue of the sub-decree and revision of the Law on Customs, the legal framework of CED’s operation is insufficient to support for its risk management approach toward compliance management. The previous Law on Customs (2005) alone can be considered to be a ‘one size fit all’ legal framework for the CED. In addition, it is unilateral approach taken by the CED and the RGC. The second element of risk-based compliance approach is client services. Client services are concerned with keeping the trading community informed about Customs rules and other regulations affecting them (Murray, 2009). The Customs administration needs to devise strategies and plans to effectively communicate relevant the rules and regulations. Such strategies include consultation arrangement, 3
  4. 4. clear administrative guidelines and public information. Examples of client service strategies from the Australian Customs Service include Quick guide to specific Customs matters of duty free concessions, migrant concessions, weapons, medications and money/cash (AustCustoms Website). This helps the travellers and trading community to understand about their obligations under Australian Customs law. Since the CED is in the process of implementing its risk management strategy, creating Risk Management and Audit Office, and modernisation there aren’t much evidence of client services strategies yet (Progress Report). Nevertheless, the Sub Steering Committee on Trade Facilitation with the support of Steering Committee for Private Sector Development, AusAID/CATAF, the World Bank, European Commission, JICA and IMF has setup a workshop on risk management strategy and the approach taken by the CED and other bodies in managing import and export operations. The private sector, including but not limited to Chamber of Commerce of Phnom Penh, GMAC, and the Cambodia Forwarder Association were presented at the workshop (Consulting Service Report). This can be seen as providing administrative operational procedures and other information to the trading community and the public. In addition, the CED publishes regulations, Customs law and sub-decrees on its website to inform the trading community and the public of import and export requirements. The published documents include declaration and lodgement procedures and import and export processing procedures. The published information is in both Khmer and English languages (CED website). At this point there isn’t any specific guide/document developed for particular clients i.e. large importing companies, exporting companies and travellers published on its website. However, the CED is expected to have such information once it completed its modernisation process. This is because good client service is a part of a well developed Customs services. The next element is compliance assessment. This element involves assessing the level of compliance of the members of the regulated community. The level of risk of particular member of trading community plays an important role in selecting methods to assess its compliance. If an entity ‘is judged to represent a relatively low risk, the level of regulatory scrutiny may be reduced, with greater reliance being placed on a company’s self-assessment’ (p. 48, Murray, 2009). On the other hand, a high risk entity may subject to strict controls and scrutiny. In other words, in assessing the level of compliance of members of the trading community, Customs administrations need to be selective in methods used to make assessment. The administration, depending on risk level of members of trading community, may use one or combination of the following methods to conduct their assessment. The methods are documentary checks, physical examinations, audit activity and investigations. Turning to compliance assessment methods used by the CED, there isn’t much information on published on its website or in its official documents on the methods employed. Nevertheless, insights to methods used can be drawn from the procedures used by the CED to process inward cargoes. Figure 2 depicts the process. The procedures suggest that documentary check is the first step and followed by physical inspection. The physical inspection is carried out based on senior customs officer’s suspicion of discrepancy with the declaration. There isn’t any indication that risk level 4
  5. 5. is used as the factor to determine physical inspection. It can be reasonably assumed that risk level is not the factor since that the CED is currently embarking on risk management strategy. Moreover, it presents a post-arrival import clearance, physical control maintained pending revenue payment and focus on non-compliance of the traditional ‘gate keeper’ style of compliance management. This management style is changing as the CED and relevant authorities are implementing risk management strategies in their import and export inspections. Figure 2: CED Import processing procedures Source: CED website The adoption of risk management strategy suggests the CED as well as other relevant agencies (Camcontrol) will assess the members of the trading community for both compliance and non-compliance. In addition, their risk levels will be identified and use as the determinant factor. Thus in due course the CED will be selective in their use of broad rang of controls to make compliance assessment. Insights into the methods to be used can also be drawn from the sub-decree on trade facilitation. The sub-decree required the CED to use pre-arrival screening and clearance and post clearance audit methods (Article 15). Moreover, Article 19 required the CED to use method of inspections and clearances that in line with ‘Policy and Strategy to 5
  6. 6. Facilitate Trade through Risk Management’ (p. 23). This infers that any method used will be varied and according to the risk levels of the companies under consideration. The last element of risk-based compliance management is divided into two, enforcement and recognition. Under the risk-based approach toward compliance, enforcement methods used by the administration are varied and once again depending on risk levels. The administration needs to thoroughly determine the causes of non- compliance, which could be the result of control problem of the company under investigation, ambiguity of administration and regulation requirements and intentional attempt to break the law. The enforcement methods to these situations are range from running awareness seminars and a pyramid approach provided by Ayres and Braithwaite (1992). Figure 3 depicts Ayres and Braithwaite (1992) approach toward enforcement. Figure 3: Enforcement Pyramid Ayre and Braithwaite (1992) contend that the methods at the base of the pyramid are likely to be used most frequently by regulatory authorities than the higher up in the pyramid. While enforcement concerns with methods used by the administration to ensure compliance with laws and regulations; recognition, on the other hand, is method or strategy used by the administration to acknowledge members of regulated community that deemed to be relatively trustworthy and relatively low risk of non-compliance. These members have good history of compliance and willingly to work with the administration to ensure further compliance. In this circumstance, the administration shall devise strategies to reward the particular members and thus induce further voluntary compliance. Some of the rewards include self-assessment of their liabilities and entitlements, less onerous reporting requirements, periodic payment arrangement and simplified procedures (Murray, 2009). 6
  7. 7. In the context of the CED, the methods of enforcement used are depending on the nature of the offence. Under Cambodia law of Customs, the first point of enforcement is civil penalty rather than persuasion or warning letter suggested by Ayre and Braithwaite (1992). Article 73 of Customs law provides: Any person who commits minor violations of regulations or provisions of this law, including inaccuracies, omissions or failure to complete any information required in a customs declaration and failure to meet requirements and obligations that have no impact on duties, taxes, prohibitions, or restrictions is subject to administrative fines of one hundred thousand (100,000) riels to five hundred thousand (500,000) riels when the irregularity is not more severely punished by this Law. Article 74 also indicates civil penalty in situations where the violations were committed and involved evasion of duty or taxes. The penalty is between one or three times of the duty or tax evaded. Criminal penalty is also part of the enforcement methods. Any offences that involved with prohibit or restricted goods will be subjected to administrative fines up to three times the value of the goods or imprisonment for one to five years (Article 75). These enforcement methods represent the ‘enforcement focus’ of the ‘gate keeper’ style of compliance management. The law on Customs was drafted during the time of modernisation of the CED and implementation of risk management strategy. It is expected, once the risk management strategy is fully implemented, the methods of persuasion and warning letter could be used. This is because it could be used to address the low risk associated matters or offences and induce voluntary compliance rather impose civil penalty. Having mentioned that the CED is in the process of implementing its risk management strategy; the knowledge of members of regulated community who comply with relevant law is not yet compiled. A progress report indicates that the CED is in a process of ‘survey of importers …to develop importer risk indicators and profiles’ (p. 1, Progress Report). In addition, the CED will use BIVAC’s (preshipment inspection company) reports to determine the level of compliance by the importers. In other words, there isn’t any recognition strategy employed by the CED at present. 3. Summary and Conclusion The four elements of the risk-based compliance management are presented in CED’s compliance management model. However, the extent of the CED fulfilment of the four elements is at different level. Among the four elements, the CED fulfils the requirements of legislative base element to the greatest extent. The RGC facilitates this achievement by revising the Law of Customs and regulated a sub-decree on “Trade Facilitation Through Risk Management”. The two pieces of legislation provide the CED the legal framework to pursue risk-based compliance management. In addition, the sub-decree was developed in consultation with both private sector and relevant import and export management agencies. Thus it reflects the interests of all parties. For the second, third and four elements, there is no direct evidence of CED’s fulfilments of the requirements. This is due the fact that the CED and other relevant agencies are in the process of implementing their risk management strategies. There 7
  8. 8. are, however, evidences of the traditional ‘gate keeper’ regulatory compliance model. Nevertheless, aspects of the risk-based compliance management can be drawn from progress report and consultation services report by supporting agencies i.e. AusAID. A progress report provides insights into the second element, Client Services, by indicating that the implementation of the risk management strategy was involved consultation with private sector parties as well as relevant agencies. Turning to assessing the level of compliance by members of regulated community, the sub- decree on “Trade Facilitation Through Risk Management” indicates that pre-arrival screening and clearance and post clearance audit methods are to be used. Lastly, evidence of enforcement methods is provided in the Law on Customs. However, there is little information on recognition strategies employed by the CED. It is expected that the CED will fulfil all of the requirements of the elements of risk- based compliance management once they have completed implementing the risk management strategy and modernisation. Nevertheless, at present time the CED is strongly conformed to risk-based compliance management on legislative base only. 8
  9. 9. Reference AusCustoms (Australian Customs Services): http://www.customs.gov.au/site/page.cfm?u=4835, Accessed on 13/04/2009 Cambodia Customs Law: http://www.customs.gov.kh/law_on_customs.html, http://www.customs.gov.kh/imports.html, http://www.customs.gov.kh/exports.html, http://www.customs.gov.kh/declaration_and_logment.html http://www.customs.gov.kh/law_on_customs.html#, Accessed on 13/04/2009 Consulting Service Report, Terms of Reference for Consulting Services: Cambodia Facilitation of Trade through Risk management Murray, A. (2009), ‘Study Guide: Regulatory Compliance Management’, Centre of Customs and Excise Studies, University of Canberra Progress Report, Draft for Discussion: Action Plan Risk management in the CED Widdowson, D. (2004), ‘Managing risk in the customs context’, in Luc De Wolf & Jose B Sokol (eds), Customs modernisation handbook, World Bank, Washington, DC, pp. 91-99 WTO Website: http://www.wto.org/english/thewto_e/countries_e/cambodia_e.htm, Accessed on 13/04/2009 9

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