Abstract
Customs uses risk management as the core philosophy to balance regulatory control and trade facilitation. To deal with emerging and evolving risks, Customs should regularly adjust their risk management techniques and develop new approaches when necessary. This article examines the performance of the Korea Customs Service (KCS) selectivity system, drawing on practices used in the fields of taxation and insurance that deal with similar kinds of risk or fraud. This article focuses on the relationship between selection and detection rather than scrutinizing selection and detection rates independently in order to alleviate concerns about smugglers possibly exploiting revealed selectivity performance data. The KCS currently uses three selection methods: manual selection, rule-based selection and random selection. During the study, manual selection surprisingly showed the highest detection rate and the best efficiency. The rule-based selection appears to play an important role in deterring fraud techniques and opens the way for Customs officers to use their experience, knowledge and skills to adopt manual selection to keep up with smugglers’ evolving approaches. Random selection also appears to have a deterrent effect because its unpredictability overcomes smugglers evolving predictions on selection patterns.
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Notes
The harmonization of the two distinct objectives does not just take into account trade facilitation more and regulatory control less than before and achieve an appropriate balance between them but also prevent the influx of high risk cargo without interfering with trade facilitation.
According to Deloach (2000), there are four ways in dealing with risk: avoid, reduce, transfer, and retain or accept.
In this article, whereas the term examination refers to probing the veracity of information on documents, such as manifests, declarations, invoice, bill of lading and packing lists, the term inspection refers to investigation of the physical status of cargo. Most cases concerning valuation issues need examination of documents without physical inspection of cargo. Cases concerning classification of products, however, require not only examination of documents but also physical inspection of products.
Many empirical studies suggest double-barreled findings on deterrence theory; whereas macro-level deterrence studies show that programs based on deterrence perspective have a weak influence on crime rates, the perceptual deterrence literature shows that deterrence measures working on perceptions of deterrence are likely to have some effects on crime (Pratt et al, 2008; Nagin, 2011).
The KCS has an automated clearance system named Uni-Pass, which processes a variety of data from freight forwarders, carriers, shippers, bonded warehouses, traders, Customs brokers and trade-related governmental agencies. The processed data are shared with its selectivity system, which has been developed along with each part of the automated clearance system and whose origin dates back to the early 1990s.
The KCS does not necessarily rely on regular selections for inspection on cargo and audit on traders. When the KCS has solid intelligence about certain cargo and transactions, it undertakes inspections and audits without the assistance of the selectivity systems.
The KCS selects manifests to inspect containers in which high risk cargoes are likely to be included in order to detect smuggling committed without import declarations.
If the trader who imports a kind of product manufactured by company A is charged with an IPR infringement, the importer usually replaces company A with another supplier to avoid his or her cargo being selected again. If the infringement on IPRs was a mistake and unusual, the importer needs to endure inspections on subsequent consignments until the KCS gets sure that Company A’s export cargo is no longer problematic and dismount the selection criterion from its selectivity system.
The KCS’s automated clearance system measures the elapsed time of each declaration and evaluates clearance performance of each Customs house with its averaged elapsed time monthly, quarterly and annually.
The KCS has a comprehensive compliance audit program as a regular check-up of traders. For comprehensive compliance audits, officers visit traders’ main offices and examine their businesses related to Customs administration all together, such as import declarations, export declarations, drawback claims, management of origins and foreign exchange transactions. To select subjects for the comprehensive compliance audit program, the KCS maintains a trader profile database combining all examinations, inspections, and investigation results and minor errors.
In the KCS, the detection rates influence field officers’ bonus, transfer to better positions and promotion. The officers had paid excessive attention to minor errors to get higher detection rates until the KCS established a policy of zeroing in on core targets in evaluation of performance of Customs houses and officers. This practice had brought about unnecessary tension with traders and had been thought of as a factor against trade facilitation. The KCS decided to consider detection rates concerning core targets in performance evaluation, even though it maintains records of minor violations.
According to the officers interviewed with the author, even though Customs field officers believe that manual selection is the most effective and efficient method, they do not think that most selections should be made by the manual selection.
The term risk in the relative risk, which is usually used in epidemiology, would be better to be interpreted as a probability of the occurrence of an event (selection) in this study.
Some Customs officers present an opinion that the primary objective of the random selection is not to detect illegitimate transactions but to capture the prevalence of illegitimate cargoes or transactions. Whereas the detection rates from the rule-based selection and the manual selection cannot be used to infer the prevalence of illegitimate cargoes and transaction in all declarations, the detection rate by the random selection shows how many illegitimate cargoes and transactions are likely to be in all declarations.
There are five different types of crime displacement: temporal (change in time), tactical (change in method), target (change in victim), territorial (change in place) and functional (change in type of crime). They have concerned that crime prevention and control measures can be compromised by these displacements and have sought to solutions to secure intended outcomes (Welsh and Farrington, 1999).
The KCS also makes selection criteria, consulting trade regulations regarding food, sanitation, and health and receiving other ministries and agencies’ requests.
The selection efficiency (=a detection rate/a selection rate) does not say a probability, or percentage. This measure can provide information of which method is superior compared to the others. This does not say how more efficient Method A is than Method B. For instance, in interpreting Table 4, it should not be said that the manual selection was three times as efficient as the manual selection in 2009.
The three selection methods all may have deterrent effect. The manual selection’s deterrent effect is quite collateral. In other words, whereas the manual selection is more punishment-oriented deterrence than the others, the rule-based selection is more prevention-oriented than the manual selection.
The subject of this study is the population of import declarations submitted to the KCS from 2009 to 2011. Significance tests are not necessary to infer population parameters from sample statistics.
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Acknowledgements
The authors are grateful to KCS staff for providing the selectivity performance data and other information in interviews. The authors also express their appreciation to WCO officials Thomas Cantens, Min Han, Jong-Ho Kim, Mariya Polner and Tadashi Yasui for their comments. The views in this article are those of the authors, and do not necessarily represent the views of the Word Customs Organization (WCO).
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Han, CR., Ireland, R. Performance measurement of the KCS customs selectivity system. Risk Manag 16, 25–43 (2014). https://doi.org/10.1057/rm.2014.2
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DOI: https://doi.org/10.1057/rm.2014.2