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).
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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
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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,
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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
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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
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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).
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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
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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.
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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
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