Improving the performance of risk management in customs procedures for imports at the customs department of quang ninh province

Subject to further clarify the argument was about risk management in customs procedures for imports and research results will [rovide specific solutions to help improve the efficiency of

Authors: NGUYEN VAN HUONG

BUI VAN KHANG LETH! KIM LIEN

Supenisor: Dr LENNARl W IKANDER

Dr MOANC Till TliUY NGUYET

Class: MPPM INTAKE 3-Group 11

ACKNOWLEDGEMENT

The thesis is completed in the Master Program of Public Management - Uppsala University by Nguyen Van Hu-ang, Bui Van Khang and Le Thi Kim Lien Certainly, the thesis will impossibly be well completed without the valuable support of the Swedish and Vietnamese supervisors as well as the leaders and employees of the agencies selected for case studies

We would like to express the gratitude to Professor Lennart Wikander - Senior Lecturer

of Department of Education, Uppsala University, Sweden, for his orienting instruction in the process of topic selection, especially in limiting the scope of study; to Dr Hoang Thi Thijy Nguyet - Senior Lecturer of Vietnam Academy of Finance, who has accompanied and guided the research process and provided the group with valuable knowledge on research methodology and useful advice

We sincerely thank the lecturers who enthusiastically imparted useful knowledge on public management during the master program to the class We also thank the support

of the University of Economics and Business, MPPM coordinators and program managers for their support and assistance

We would like to thank the Vietnam Customs, Quang Ninh Department for materials provision, answering interviews and favorable conditions for our group to access data sources and relevant responsible informants

Thanks for the support of our classmates, friends, and colleagues who have contributed ideas, and information to the completion of the thesis

Last but not least We would like to express our special gratefulness to our beloved family members for their endless and honest encouragements and supports to us during our study They have been giving us confidences and strengths to overcome difficulties

in study

Respectfully,

Nguyen Van Huang Bui Van Khang Le Thj Kim Lien

ABSTRACT

Thesis Title:

Improving the Performance of Risk Management in Customs Procedures for Imports at the Customs Department of Quang Ninh Province

Level:Master Thesis on Public Management

Authors: Nguyen Van Hw&ng, Bui Van Khang, Le Thi Kim Lien

Supervisors:

Swedish Supervisor: Dr Lennart Wikander

Local Supervisor: Dr Hoang Thi Thiiy Nguyet

Defense Date: 12-13 December 2011

Objectives:

To conduct a systematic and comprehensive study of application of risk management in customs procedures for imports, based on which to provide solutions to improve the effectiveness of the application at the Customs Department of Quang Ninh Province

Methodologies:

Methods use in the study include: Literature review, data collection and data analysis, comparison as well as information synthesis in a scientific, systematic and dialectical manner

This study is also based on the viewpoints of the State and Government on

on simplification and harmonization of Customs procedures

Data used in this research include the system of current regulations and recommendations of Vietnam Customs and international customs organizations

on customs procedures in general and Risk Management in particular, primary

1

and secondary data from relevant survey, fieldwork data collection, documents

and practice of application of risk management in Vietnam, particular in Quang Ninh Department of Customs

Results and Concusions:

Risk management is an advanced management methods, benefits to both Customs and business Risk management provides the customs office a method of scientific management through the identification of high risk, priority focus on managing resources, thereby reducing the work pressure, balance between facilitating trade and the tightly controlled process of law-abiding businesses

The research is based on documents collected and a theoretical basis of general knowledge on the management of customs for imports, the factors affecting the application of Risk Management, experiences in risk management of

a number of developed countries in the world and draws lessons for Vietnam

From a theoretical basis, the authors studied the situation applicable at the Customs Department of Quang Ninh Province to assess the results achieved, shortcomings and limitations, the causes and challenges Research results are set out solutions and making a number of recommendations to improve the efficiency of application in the future

Limitation and recommendation for further study

Application of Risk Management in Customs operations in general and in procedures for imported goods in particular is a very new and difficult problems not only for Quang Ninh Customs but also with all the Customs Department in the industry

Risk management has been applied to five years and Vietnam Customs has studied the method, both in theory and application, implementation is paralleled with modify, supplement to perfect the performance to suit the characteristics of Vietnam Thus the results outlined in the thesis is just the initial and very early

results

In addition, the range of the study is only in a provincial Customs

Department with a specific features, therefore, it should not be generalized to assess the current status of all applicable customs department across the country,

so the results study did not give a solution to improve efficiency in all sector to apply-

Therefore, further research should increase the number of cases and expand the scope of research to assess the overall situation applies, then finding out

solutions to improve efficiency in Vietnam Customs to apply

Thesis Contribution:

Research subject is one of the few original research on new management methods applied in the customs services Subject to further clarify the argument was about risk management in customs procedures for imports and research results will [)rovide specific solutions to help improve the efficiency of application of risk management in the process of customs clearance for imported goods in Quang Ninh now and in the future

Key words:

Customs, risk management, Customs process and procedures, imports, reform and development of customs modernization, e-customs procedures

TABLE OF CONTENT

ABBREVIATIONS 1

CHAPTER I: INTRODUCTION 2

1 Background and Justifications 2

2 Objective and tasks of studies 4

3 Scientific and practical significance of the study 4

4 Methodologies 4

5 Object and scope of study 5

CHAPTER II: THEORETICAL BACKGROUND OF RISK MANAGEMENT IN CUSTOMS

PROCEDURE FOR IMPORTED GOODS 6

1 General issues of customs management of imported goods 6

2 Factors influencing application of risk management in customs procedure for

imported goods 17

3 International experiences 20

CHAPTER III: THE REALITY OF RISK MANAGEMENT IN CUSTOMS PROCEDURES FOR

IMPORTS AT THE CUSTOMS DEPARTMENT OF QUANG NINH PROVINCE 26

1 The reality (from 2006 to 30 June 2011) 26

2 Evaluation of effectiveness 40

3 Challenges 43 CHAPTER IV: SOLUTIONS TO IMPROVE THE EFFECTIVENESS OF RISK MANAGEMENT

IN CUSTOMS PROCEDURE FOR IMPORTED GOODS AT QUANG NINH PROVINCE'S

CUSTOMS 47

1 The orientations of Vietnam Customs Service 47

2 Solutions to improve the effectiveness of risk management in customs procedure

for imported goods at Quang Ninh Province's customs 48

CONCLUSIONS 53

ABBREVIATIONS

AFTA: ASEAN Free Trade Area

APEC: Asia-Pacific Economic Cooperation Forum

ASEM: The Asia-Europe Meeting

C/0: Country of Origin

CBP: U.S Customs and Border Protection

CEPT: Agreement on the Common Effective Preferential Tariff

CiOl: The Customs Information System

IT: Information Technology

RKC: The International Convention on the Simplification and Harmonization of Customs Procedures (revised Kyoto Convention)

FU: The European Union

GATT: The General Agreement on Tariffs and Trade

GTT22: Tax-based Price Management Software

US: The Harmonised System of Designation and Codification of Goods

KT559: Tax Accounting Management Software

Riskman: Risk Management Programme

HCP: E-custom Procedure

VCCI: Vietnam Chamber of Commerce and Industry

WAN: Wide Area Network

WCO: World Customs Organization

WTO: World Trade Organisation

CHAPTER I: INTRODUCTION

1 Background and Justifications

In the current context, pressures of increasing workloads and dealing with sudden

changes in the world economy and politics are burdens facing the customs service, which has to both seek trade-friendly solutions and conduct tight control of import-export flows with its unchanged, or even reduced, resources As a result, the customs service of Vietnam has been accelerating its administrative procedure reform and modernization towards harmonization of customs procedures with those of other countries in the world A very important task of that process, which has been being attentively carried out, is application

of risk management to customs procedures for imported goods, which is a modern managerial method that benefits both the customs service and businesses Risk management is a scientific managerial method that identifies and focus customs resources

on management of objects of high risks so as to reduce work pressures and balance trade facilitation and tight control of businesses' conformity to the law

Application of risk management techniques is an integral part and a prerequisite for the customs service's deployment of its reform and modernization programmes It has been recommended by WCO through approval of the International Convention on the Simplification and Harmonization of Customs procedures (revised Kyoto Convention -RKC) in June 1999, whose recommendations (6.3, 6.4 and 6.5) mention application of risk management in customs control In Vietnam, risk management has been made a central task in the overall plan of reform, development and modernization of the customs service Its application in the customs procedures for imported goods will reduce the workloads thanks to resulting fewer customs procedures and control percentages, focusing only on critical objects; the customs service can arrange its resources suitably and effectively based

on identified and evaluated risks Risk management therefore helps improve the customs service's ability to control, degrees of conformity to the law by businesses, and the cooperation between the customs service and businesses

There has been much research on laws on customs; state management by the laws on customs; Vietnam's customs service in the national integration into the world economy;

reform and modernization of the service Those studies have mentioned the national integration into the world economy, reform and modernization of the customs service, and some aspects related to application of risk management in customs; satisfaction of the requirements to accelerate the national integration into the world economy, modernization

of the service to conduct better reforms of customs procedures; facilitation of export business, immigration, transit, tourism, increased foreign investment; contribution

import-to successful implementation of state policies on development of economy, culture, social affairs, science and technology, international cooperation and exchange, protection of the national sovereignty and security, legitimate rights and interests of the state, businesses and individuals Yet, no single research has ever been conducted on risk management in customs procedure for imported goods in Vietnam in general and in Quang Ninh Province

in particular

Since its application of risk management in customs procedure for imported goods, the Customs Department of Quang Ninh Province has seen major changes in its managerial methods through minimization of customs procedures while still ensuring relevant control

of conformity to the customs law However, because the method includes many new techniques, its implementation has encountered various difficulties and challenges, especially in terms of perception, knowledge, and skills

We would like, therefore, to study the topic of: "Improving the Performance of Risk Management in Customs Procedures for Imports at the Customs Deportment of Quang Ninh Province" to have an overall analysis of the effectiveness of this application by Quang

Ninh Province; the resulting benefits for the customs department and businesses/enterprises; the problems and shortcomings in its implementation; based on which to provide relevant solutions and recommendations for the government authorities and import-export businesses

2 Objective and tasks ofstudies

- Objectives: to conduct a systematic comprehensive study of application of risk management in customs procedure for imported goods, based on which to provide solutions to improve the effectiveness of the application at the Customs Department of Quang Ninh Province

+ To propose solutions to improve the effectiveness of the application of risk management in customs procedures for imported goods in Quang Ninh Province, which will contribute to development of the customs service during the national integration into the regional and the world economy

3 Scientific and practical significance of the study

- Scientifically, the study will further clarify the theories on risk management in customs procedure for imported goods

- Practically, the evaluation of the effectiveness and limitations in the application of risk management, and, the proposal of specific solutions will contribute to improvement of the effectiveness of application of risk management in customs procedure for imported goods in Quang Ninh Province in the coming time

Besides, the study is hoped to provide a useful reference for other studies of risk management in customs procedure for imported goods in particular and that in customs activities in general

4 Methodologies

We have based on the recommendations of application of risk management in the

revised "International Convention on the Simplification and Harmonization of Customs procedures" of WCO: Brussels, 1999 and "Instructions on Risk Management" of WCO:

Brussels, 2003 to study influences of application of risk management on simplification and harmonization of customs procedures and international integration and development

The authors have also studied the legal regulations of international organizations on customs procedures; documents and practice of application of risk management in customs procedures of some other countries; data, collected from the General Department of Customs (Vietnam Customs) and the Customs Department of Quang Ninh Province on recent application of risk management; and, journals such as Information Technology and Finance, Customs Studies, Customs Newspapers, and various related websites This study serves our evaluation of the role, importance, and need to apply risk management in customs procedures in general and in customs procedure for imported goods in particular

This study is also based on the viewpoints of the State, collected data and statistical methods, analysis, comparison, as well as synthesis in a scientific, systematic and dialectical m.inner

S Object and scope of study

- This study focuses on the effectiveness of the application of risk management in customs procedure for imported goods at the Customs Department of Quang Ninh Province

- Scope of study: The reality of the application of risk management in customs procedure for imported goods at the Customs Department of Quang Ninh Province between 2006 and 30 June 2011

CHAPTER M: THEORETICAL BACKGROUND OF RISK MANAGEMENT IN CUSTOMS

PROCEDURE FOR IMPORTED GOODS

1 General issues of customs management of imported goods

1.1 The need of customs control over imported goods

1.1.1 Nature of customs control over imported goods

Good exchanges between countries form an inevitable trend Because countries have independent political and economic sovereignty, international trade is also very much affected by national policies, and state control over crossborder goods is of special importance in prevention of abusing international trade for objectives that are not beneficial for a single country in particular and the mankind in general such as trafficking or import of prohibited goods

The Customs Office is the state authority for control of crossborder goods It is

defined by WCO that 'the Customs Office is the governmental agency that exercises the Law

on Customs in customs and other taxation, and is, at the same time, responsible for exercising other laws related to import, export, shipping or storage of goods' The Law on Customs of the Socialist Republic of Vietnam (revised in 2005) provides that "Vietnam's Customs Service is responsible for exercising control and supervision of goods and means of transport; prevention of crossborder trafficking; organization of implementation of the laws on taxation

of imports and exports; statistics of imports and exports; recommendations of guidelines and methods of state management of customs over import, export, immigration, transit, and tax policy for import and export" ^

In this age of globalization and development of open economies, customs control of import and export is increasingly necessary, especially in the field of imported goods because export of most domestic goods, encouraged by the state, takes priority in customs procedures

1.1.2 Impacts of customs control over imports

Article I! Law on Customs (revised in 2005)

* Positive impacts:

- Customs control exercises state policies that orient imports for notional interests The

customs exercise control over import and transit to prevent transportation of drugs, explosives, illegal weapons; trafficking of goods that violate intellectual property, fake or low- quality goods , so as to contribute to maintenance of the national security, creation of a healthy competitive environment, and promotion of domestic economy

- Customs control plays an important role in implementation of the Government's

economic policies Through collecting taxes and applying customs procedures, the customs

office exercises policies to either encourage or discourage import of certain goods to protect national interests, and it helps the Government exercise a legal defence policy through its provision of information and support of investigation of imported goods It is also the face of a nation in relation w i t h international visitors The attitude, competence, organizational level and professionalism of the customs office refiect the culture and level

of organization and management of a nation

- Customs control supports and facilitates commercial development and contributes to

national development and growth The efforts of customs reform and modernisation to

reduce costs and time of conducting customs procedures have facilitated development of foreign trades and created an attractive environment for foreign direct investments

- Besides, customs control also contribute to maintenance of on equal playground for

every business involving in international trade activities

* On the contrary, customs control has the following negative impacts:

- It increases the time and costs of circulation of imported goods If the customs office

has a poor ability and an outdated control process, the transportation of an imported goods

w i l l be stopped for customs control procedures Consequently, the goods owner has to pay additional costs of storage or even black costs This is the biggest obstacle of customs control over foreign trade

- It sets up barriers against crossborder goods by tariffs and other conditions of

customs clearance High tariffs mean a quite big additional cost for imported goods that

increases its price and thus reduces its competitiveness and domestic consumption of it Besides, due to the complicated nature of goods, some nations use customs procedures to demotivate imports

- Customs control discriminate domestic from imported goods, and between exported

goods and domestically consumed goods Return of value-added tax on exported goods and

tariffs on imported goods create different grounds for domestic, imported and exported goods This impact not only causes difficulties for foreign trade but also provide potentials

of tax evasion and abuse of tax return for illegitimate private interests

Though causing certain obstacles, customs control over imported goods has its increasing role along increasing exchanges with other countries under regionalization and globalisation Because illegal and terrorist organizations are increasingly abusing free trade

to harm peace of people, the customs office must be enhanced in terms of equipment, power, qualification, and modern managerial methods, and the requirement of customs reform and modernization is to balance between control over and facilitation of trade As a result, international organizations, especially the World Trade Organisation (WTO) and the World Customs Organisation (WCO) are seeking all ways to encourage countries to simplify, make transparent, and harmonise their customs procedures to favour more convenient international trade, and one of the recommended reforms is application of risk management in customs procedures for imported goods

1.2 Concepts and principles of risk management

1.2.1 Concepts of risk management in customs activities

- Risks in customs activities are understood to be disconformity or insufficient

conformity to the customs law Article 2 of Decision 48/2008/QD-BTC dated 04/7/2009 by

the Minister of Finance defines that 'a risk in customs activities is a potential risk of disconformity to the customs law in import, export, transit of goods, immigration, and transit

of means of transport' ^ In the current context, Vietnam's Customs Service is aiming at both

facilitation of international trade and control over conformity to the customs law As a result, risks in customs activities are obstacles to achievement of those two objectives

Item I Article 2 Decision No 48'2008 QD-BTC dated 0-4 07 2008 by Minister of Finance

- Risk management in customs activities has been developed by WCO into common standards that are recommended to its member countries in 'The International Convention

on the Simplification and Harmonization of Customs procedures' (Revised Kyoto Convention

or RKC) K In an approach to the modern customs managerial method, risk management is

understood to be a systematic application of policies, procedures and conventions in state management of customs in order to create a consistent and effective mechanism for discovery and settlement of violations, through which to create an environment and conditions for voluntary compliance to and minimal violations of the customs law

Therefore, 'Risk management is a systematic application of technical methods, processes and

conventions that enable the customs office to arrange its resources properly for effective focal

management of risk-identified objects and fields "*',

Application of risk management by the customs office is based on collection, analysis and evaluation of information on organizations and individuals conducting import, export, transit of goods, immigration and transit of means of transport; foreign and domestic organizations and individuals being partners of or involved in these activities; information on countries of origin of imported goods; countries or regions of import or export; place of transit of goods to Vietnam; policy of management of imports and exports;

p r i o r i t y policy for import and export, or tariff preferences of Vietnam or between it and other countries

After strictly following every relevant regulation or process without discover)' of any violation of the customs law, customs officers shall implement customs procedures, control, and supervision of import, export, transit of goods and means of transportation, etc m line w i t h the risk management process, w i t h exemption of their individual responsibility

1.2.2 Principles of risk management in customs activities

Principle 1: Maximal facilitation of trading activities The customs' application of

risk management is to facilitate organisations and individuals that conform to the customs law, which w i l l be given the most simple customs control, the quickest customs clearance

* RKC (1999 - Recommendations 6 3 6.4 and 6.5)

* hem 2, Article 2, Decision \ o 48 2008 QD-BTC dated 04'07/2008 by Minister o f Finance

and a low customs cost, which altogether, in turn, will facilitate crossborder exchanges of goods

Principle 2: Encouragement of voluntary conformity to the customs low Risk

management is in fact discrimination in customs control over different organizations and individuals, based on their respective conformity to the law, so as to encourage the business community to conduct better compliance with the customs law

Principle 3: Discrimination of controlled objects to apply different control regimes, based on available information The customs office shall collect and analysis information;

evaluate risks in, during and after customs clearance, based on given criteria at a time, the customs law, its actual conditions and ability to decide its control, supervision, post-customs-clearance control, customs control over imports in the following cases: violation

of the customs law; showing signs of violation of the customs law; high degree of risk shown by analytical results, and random selections Cases of low degrees of risk will be exempted from control

Principle 4: Tight focal control over organizations and individuals that do not conform

to the customs low Measures of control will increase proportionally to degrees of risk

Those of high and very high degrees of risk will be tightly controlled Checkpoint control will be added with frequent control after customs clearance, especially when any sign of violation has been found

Principle 5: Scientific, objective and democratic organisation of effective customs activities The customs office will focus its resources on management of identified highly

risky objects so that its management will not be thin-spread; its work pressures will be reduced; and, balance will be reached between increased work amount and limited resources

1.3 Process of risk management in customs procedures for imports

Before WTO and WCO's recommendations of customs management reforms in line with the principles of risk management, every import and its value for taxation were

directly checked, no matter whether they were of doubt or not Although exceptions such

as exemption, proportional check, etc were available, control of every piece of import was

more popular Because individual customs officers determined the form and proportion of

a particular check subjectively, customs were often unsystematic and customs clearance was slow

To further facilitate businesses, simplify customs procedures, and overcome of limitations, the Revised 2005 Customs Law includes the concept of risk management, which provides that those organizations and individuals that conform well to the law or bear a low degree of risk will be given preferences while the customs office will focus its resources on control over more highly risky objects

The application of risk management has been implemented in a logical and systematic process (from context study, identification, analysis, evaluation, settlement, risk management, and association between risks and their impacts), which is carried out through series of techniques such as data collection, analysis, risk evaluation and settlement and use

of a system of standardized criteria that enable recognition and evaluation of degrees of risk;

and, it is called the Risk management process

The risk management process consists of four steps ^:

D a t a c o l l e c t i o n ,

Risk i d e i U i r i c a t i o n

- Objectives, duties, scope

- An.ilysis of related factors

• t:st<ihlishnient of criteria for risk

«jitoring, check, reevaluation, and adjustments

V Monitoring a risk settlement

• Step 1 Data collection and risk identification;

• Step 2 Risk analysis and evaluation; development of documents for management of businesses and risks to evaluate degrees of conformity to the law by importing organizations and individuals;

• Step 3 Risk settlement: Carrying out customs activities based on analytical results and available human and material resources, so as to ensure implementation of the customs law;

• Step 4 Monitoring, check and re-evaluation of implementation of the steps above; measuring and evaluating degrees of conformity to the customs law of importing or import-

' Article 4 Decision 4 8 / 2 0 0 8 / Q D - B T C dated 04 7 2008 by the Minister o f Finance

12

nvolved organizations and individuals, in order to adjust customs activities effectively

The process mentioned above is a standard guideline for development and deployment of risk management techniques, and it is one of the bases for the General Department of Customs' issuance of Decision 35/QD-TCHQ regulating and guiding contents of application of risk management in customs procedures for commercial imports

1.4 Contents of risk management in customs procedure for imported goods

1.4.1 Identification of risks in imports

a Risk identification

* In terms of sources:

- Potential risks are those originating from economic subjects' motivations of

private interests that violate the law

- Regulative risks stem from gaps in the law that give importers opportunities to

have illegal trading behaviours

- Check risk are serious violations that customs officers can not uncover due to their

weaknesses or mistakes of lower-level customs officers that can not be uncovered by higher-level customs

* In terms of customs steps:

- Risks in crossborder transportation of goods come from customs officers' failure to

discover illegal transportation of such

- Risks in filling of customs forms are those produced by wrong information on taxes

to be paid to the government

- Risks in customs activities are often found when customs officers make mistakes

in tax calculation or check of an import that gives the importer an opportunity to violate the law

- Risks from provision of information occur when customs officers are given

misinformation that misguide their check, or when the customs office gives misinformation that leads to misleading government decisions or policies

- Force majeure risks are caused by inability of technology and equipment to

support customs check, or influences of weather, natural disasters, etc that lead to wrong conclusions or failure to uncover violations

b Causes of risk

- The economic and organizational contexts of a nation, in which law enforcement is

ineffective with inadequate punishment of violating businesses, unhealthy competition, etc Potential risks are high

- The ability of the customs office does not meet the requirements of human

resources, technology, organisation, management, etc

- Outdated technology, weak information system or lack of necessary check equipment

that lead to mistakes in customs activities and difficulties in finding fraudulences

- Causes related to negative aspects of importers, mainly due to the fact that importers

tend to seek ways of tax evasion to have more interests and lower price of their imported goods In addition, national prohibition of imports of weapons, drugs, etc make those goods very attractive to importers in the black market, so they tend to have black imports or buy customs officers for illegal imports

1.4.2 Criteria for risk management

Criteria for risk management are quantifiable tools to evaluate degrees of risk and inform relevant effective decisions of risk settlement They provide the basis for decision-making on form of customs check of an import The criteria are on regulations, analysis, scoring, and random choice

DETAILED MODEL OF SYSTEM CHANNELS

- The analytical criteria are established for risk groups, based on risk cases and risk management database; signs of risks are identified through data collection and analysis during implementation of customs procedures; requirements of technical coordination between the customs office and other authorities

- The scoring criteria are used to identify degrees of risk of a business and its import

They are based on risk scoring in line with the Set of Criteria for Business evaluation, which

has three levels: low, average and high The risk-scoring criteria for an import are based on

risk-scoring in line w i t h the Set of Scoring Criteria

- The random choice criteria are used to analyse and measure importers' degrees of compliance to the customs law through selecting certain lots of imports for direct

15

examination Random choices are made automatically by the system at a rate of no more than 5% of the total number of import lots, equal to an average rate of the previous month

at the same customs office

of related objects of risk The influence of each degree of risk on the common objectives will

be considered, and corresponding measures and settlements will be provided

1.4.4 Risk control and settlement

After evaluating and measuring a degree of risk, the customs office will provide the most effective corresponding methods of risk control and settlement

- Customs managers tend to eliminate unacceptable risks such as seriously polluting scraps (e.g waste lead batteries, industrial wastes ), or drugs that seriously harms community health, which are often prohibited from import by most countries in the world

However, facing the current development of international trade and globalization, no single nation can stay out of the game closing its border gates to prevent trafficking or commercial fraudulences, so the customs must enhance its ability to control the border with support of modern technical equipment, learning experience and exchanging information with related authorities and international organisations

- Facing acceptable risks, customs managers will use the following methods:

+ Damage prevention: they will attack those risks to reduce possible damages through, for example, development and issuance of lists of conditional imports in a specific period and

refusal to grant permits to imports that threaten the country's sustainable and strategic socio-economic development

+ Risk minimisation: this measure will reduce damaged values if any For example, to limit tax fraudulences, a country may reduce its tax rates to the lowest possible [the Agreement on the Common Effective Preferential Tariff (CEPT) require every of its member countries to reduce import tax rates on goods from another member country to 0% to 5% )

2 Factors influencing application of risk management in customs procedure for

it will pay little attention to risk management in customs

- Secondly, high efficiency and effectiveness of state management will create a good environment that encourage businesses to follow laws in general and the law on custom in particular On the contraiy, a state that can not manage the society by law will cultivate risks in customs that invalidate risk management

- Thirdly, correct government guidelines of socio-economic development will facilitate proper foreign trade activities and enable the customs service to apply a risk management process in customs [)r()ceduies favourably

2.2 Legal regulations of international organizations on customs procedures

2.2.1 Regulations of the Worid Trade Organisation (WTO)

WTO encourages every customs procedure reform that facilitate trade between countries Accordingly, its Agreement on Tariff and Customs Procedure Harmonisation provides prmciples that the customs ser\'ice of its member countries has to follow, such as

price-based taxation; avoidance of use of customs procedures to prevent trading activities unnecessarily; no discrimination in customs check of goods from different countries; except for cases of regional alliances, harmonization of customs procedures of different countries WTO encourages its member countries to apply the WCO standards, on of

which is application of risk management in customs procedures, and it also supports and

presses them to implement As a result, the WTO member countries, sooner or later, have

to reform their customs procedures towards popular application of risk management

2.2.2 Regulations of other international organisations

- Influences ofAPEC's regulations on application of risk management in customs

APEC is an international organization that has important influences over the world economy One of its objectives is to promote free trade and investment in the Asian-Pacific region in particular and in the world in general The organization therefore encourages its member countries to conduct procedures reform in line with the WTO's principles or even more progressively if WTO negotiation rounds are too slow However, most of its

recommendations are not compulsory but influential mainly through economic impacts

and trade prestige, so its pressure on application of risk management is not pressing as that

by WTO

- Influences ofAFTA's regulations on application of risk management in customs

ASEAN is enjoying the most rapid growth rate and attracting attention of the world powers To make the region a free trade area, the member countries have signed CEPT, that both aims to reduce taxes on imports from ASEAN member countries to 0% to 5% and recommend them to actively harmonise their customs procedures, with an emphasis on requirements of application of risk management

2.3 Customs factors

The government's political determination, direction and prioritized resources, and pressures from international organizations are the factors that lay preconditions for the customs' deployment of risk management However, effective application of risk management also depends on the customs' internal factors

- The first factor is the customs' political determination, which is expressed in the central customs office's direction through its quick, sufficient and consistent issuance of written instructions on deployment of risk management; its attentive training and staff arrangement; and, its full empowerment of the risk management section

- The second factor is customs officers' attitude, competence and qualifications Risk management requires customs officers to conduct high-level collection, analysis and evaluation

of information that they in general do not want because risk management requires many new skills and may reduce some officers' power As a consequence, customs officers will not cooperate actively without a relevant pressure and will form an obstacle to implementation of risk management

- The third factor is IT application and provision of technical equipment and material facilities for customs offices The scope and degree of accuracy of risk management depends on the sufficiency and update of information As a result, risk management will be more favourably conducted if the customs attentively invest in material facilities, IT technology, and modern equipment such as container scanners, luggage scanners, cameras, positioning devices

2.4 Business factors

The number, size, nature and diversification of businesses involved in foreign trade

largely affect the application of risk management in customs procedures A big number of involved enterprises that require much information update will press the customs' information system Different business sizes also require different methods of settlement: big businesses will have reduced customs costs per product of customs clearance while small businesses with small imports will cause difficulties in customs management in general and application of risk management in particular Besides, risk management is

ilso much affected by the unstable system of businesses and businessmen's ethics If most

)f the businesses have big legal imports with support from their associations, it will be easier for the customs' application of risk management; otherwise, if most of the businesses lave small imports with appreciation of short-term benefits and without good business )ractices, application of risk management will be made more difficult

2.5 Import-based factors

The increasing size of imports, their diverse and frequently changing types may lead

to mistakes due to insufficient or outdated information in application of risk management

Besides, some goods of special nature requires the customs ofllce to have special treatments, and government priorities on types of goods, country of origin, lists of goods under different tariff regimes of different international treaties, etc also make it more complicated for risk management

2.6 Factors from the international market

Globalization and quick development of international trade that have been accelerating economic development and growth in many regions of the w o r l d are pushing

up foreign trade growth that causes pressures on customs offices to quickly apply risk management techniques in the face of their limited resources

Moreover, establishment of the free trade areas also encourages customs services to apply risk management techniques because bigger trading countries in a free trade area are the first to apply risk management and will influence the other countries in the same area, together w i t h the urge of the principle on harmonization of customs procedures, to quickly move to application of risk management techniques in customs procedures

3 International experiences

Risk management in customs procedures have been applied in many countries and have proved successful in support of anti-fraudulences, anti-trafficking, and promotion of imports and exports This thesis will present the experience of some countries representative of the different areas of the world that have applied risk management successfully

3.1 The UK experience

Like many other countries' customs, the UK Customs carry out similarly conduct border control of miports, exports, transit, crossborder means of transport; taxation; investigation of

trafficking, and customs statistics Its risk management system is consistent with that of the European Union and shares the same IT system with continental European countries

In organizational terms, the UK Customs has an intelligence unit for risk management and a crime investigation unit; the former unit has its overseas divisions called Customs Attaches or Customs Representatives at UK Embassies, which are technically managed by other governmental agencies and report to the UK Customs The UK Customs' risk management includes information collection and conversion of collected information into intelligence information for its technical units The intelligence, risk management, and crime investigation units have very close coordination: Intelligence information from different sources will be sent to the risk management and crime investigation units for implementation of activities related to customs clearance, identification of degree of compliance, taxation, anti-trafficking, anti-terrorism The Customs' overseas intelligence is present mainly in Europe, China and Hong Kong, and a domestic unit will receive its information and send it to related offices This system is extremely important in distance control of import flows into the UK and realization of risk management

Identification of highly risky lots depends on intelligence information and other related information such as a business's past conformity to the law, information of a lot extracted from the information system of transport businesses, information on citizen management, demographic surveys

Since 1 July 2009, the UK Customs has been following the regulation on sending information as provided by the EU's Custom Law that require ship owners to send information on goods, number of containers, warehouses, and ship to the Customs before a ship arrives at its destination It has collected e-information of some kinds to identify highly risky imports for focused check and effective use of its resources ^

e-3.2 Experience of Japan

lapan has one of the most advanced customs forces in the world In 1996, thanks to its application of risk management in customs clearance of imports, it moved from a tax-calculating customs system to an importer's declaring and tax-calculating system, mainly to

* http://www.quangninhcustoms.gov \n^Lists'HaiOuanQuocTe'\'ie\vDetails.aspx?ID-4

encourage importers to pay customs taxes in line with their own declarations However, not every importer's declaration is accurate due to inadequate knowledge or misunderstanding of legal documents and related regulations, etc As a consequence, each form is so carefully reviewed at the point of import procedure that this may slow down customs clearances As a result, the Japanese Customs has applied criteria for risk evaluation and analysis

The Japanese Customs controls some 180,000 organisations and individuals as importers and exporters Through risk analysis involving such criteria as transactional turnovers, times of violations, frequency of operation, etc it has classified some 46,000 of them into the group of potential control It also adds about another 5,000 businesses to this group annually, based on its annual, quarterly and monthly reviews The Japanese Customs mainly applies the following criteria of risk management: abnormal import turnovers; a business's degree of conformity to the law; types of imports, tax rates and tax amounts to

be paid; documents of post-customs clearance; customs clearance documents, the tax amounts in doubt of fraudulence and other intelligence information ^

3.3 Singapore's experience

Singapore is believed to have a modern customs service in ASEAN and the world, with

a comprehensive consistent system of customs law and full application of the standards of ASEAN and the regulations of WCO and WTO Following are some experience of Singapore's Customs Service in application of risk management

- Development of a five-step customs process: Select objects of control; Control pie[)arati()n; (lontrol ini|)lcmentation; Control ending; and Evaluation of control results Its risk manageriient is carried out in the fi)llowing seven steps:

Content establishment: Consideration of risk-influencing factors (environment, policy,

regime, etc or related businesses)

Risk identification: What are the common types of risk? How are they formed? Why

ire there those risks? What is the effectiveness of the current control?

hnp://www.quangninhcusloms.gov.vn/Lists/HaiQuanQuocTe \'iewDetails.aspx?ID

Risk analysis: Identifying possible degrees of risk and corresponding consequences so

as to identify degrees of risk: acceptable, low, average, high, very high

Risk evaluation: Focusing on important factors such as whether a risk is acceptable

and of what importance it is;

Risk settlement: Identifying if more control is needed or how many resources are

needed to settle risks;

Supervision and revision: Evaluating effectiveness, cost-saving, and compliance to

existing standards, and possible improvement of a risk settlement;

Information and advice: Revising the previous steps and increasing exchanges of

information with stakeholders to have an effective overall risk management plan

- In terms of development of organizational structure:

V- Object-selecting division: This division is based on the database from intelligence

information to focus on studying critical objects and types of imports that contain popular violations; making documents; analyzing and selecting objects of control It also identifies degrees of risks

+ Direct-control division: This division focuses on businesses of a high degree of risk It

conducts direct control at those businesses and inform them to prepare for its check It searches evidence of violations by a business; propagandizes the customs procedures and encourages businesses to conduct regular revision to identify tax amounts unpaid to the state; improves businesses' conformity to the law through indicating their violations for self-correction; and, enhances the close relationship between businesses and the customs service

-f- Investigation division: This division focuses on highly risky businesses and conducts

long control at importers' headquarters to seek evidence of evasion of customs tax and good and service tax; receive cases of serious violation from the direct-control division; investigate fraudulences and provide measures of settlement for violating importers and related objects It may arrest and prosecute violators before the court

The divisions of direct control and investigation share information for their work, and

they provide the object-selecting division with feedbacks so that the former division can add information on certain objects.^

3.4 Lessons of experience for Vietnam's Customs Service

First, application of risk management is an indispensable requirement of the customs

service of every country in international integration and development, in order to balance between control and facilitation of trade and between increasing workloads and disproportionate increase of resources Vietnam must proactively and quickly prepare conditions for quick application of risk management in customs procedures

Secondly, application of risk management requires sufficient, consistent, updated

information, including, especially, the pre-warning and overseas intelligence information The

UK Customs' experience shows that effective application of risk management requires attentive development of the information system from the beginning, especially the overseas intelligence system and an effective domestic network

Thirdly, application of risk management must be linked with customs

modernisation, and application of IT in customs procedures will facilitate effective deployment of risk management E-customs clearance, onc-stop-shop, etc will increase the value of business classification into green, yellow and red channels

Fourthly, diverse forms of risk management must be introduced in customs

procedures in general and for imports in particular

Fifthly, a professional risk management organization must be developed to

standardize selected criteria and function as a contact for information synthesis

Sixthly, an information system must be developed to support risk management and its

management A comparison of the risk management system of Vietnam and other developed countries like the UK, Japan, and Singapore shows that Vietnam's Customs Service has just had part of the whole system and is much more outdated than those of other countries

* hnp://www.hanoicustomsgo\.vn\vebs'modules.php?name^Ne\vs&op=vicwsi&sid^490

Seventhly, a sufficient legal background must be provided for application of risk

management in customs procedure for imported goods Such a mechanism must allow the customs service to apply relevant measures and sanctions such as fines, account blockade, confiscation of assets and others

Eighthly, application of risk management must be based on realization of modern

customs Most of the other countries mentioned above have established effective importer's self-declaring and selfcalculating mechanisms Their application of IT in customs procedures has facilitated them to realize risk management more easily

Ninthly, interagency coordination must be upheld in application of risk management

The customs office must have access to documents and data of businesses, provided by banks, tax offices, insurance companies, market authorities, police and other related agencies

As a result, application of risk management in customs procedures for imports is an indispensable requirement This method not only balances control and facilitation of trade activities but also helps overcome limitations and meet the managerial requirements of modern customs in this new phase

CHAPTER III: THE REALITY OF RISK MANAGEMENT IN CUSTOMS PROCEDURES FOR IMPORTS AT THE CUSTOMS DEPARTMENT OF QUANG NINH PROVINCE

1 The reality (from 2006 to 30 |une 2011)

1.1 Some characteristics of application of risk management in customs procedure for imported goods

1.1.1 The recent process of reform, development and modernization of Vietnam's

Customs Service

Customs activities are always linked with international trade and exchanges, and the history of the customs service is always that of reform and modernization to have timely responses to changes of international standards in trade, investment, and international exchanges as well as the requirements of state management of customs Between 2001 and

2005, the customs modernization programme had finished its first period of evaluation of customs values in line with the principles of GATT; the customs procedures had achieved international standards; the deployment of post-customs-clearance control and application of risk management had had initial results; recruitment and training had paid attention to both qualifications and ethics

From 2006 to 2011, Vietnam's Customs Service continued its modernization programme, [ihase 3, to develop a partially automatic customs model, centralized data processing at provincial department level, gradual application of risk management techniques, application of IT and modern equipment in critical sites Realizing Decision 149/Ql) TTg dated 20/6/2005 by the Prime Minister, it piloted e-Customs at the Departments of Customs of Hai Phong and Ho Chi Minh Cities, and spread e-Customs to 10

Dihcr provincial-level departments of customs under Decision 103/2009/QD-TTg dated

12/H/2009 by the Prime Minister Official Letter 1757/VPCP-KTTH dated 23/3/2011 of :he Government Office has allowed the Customs Service to spread e-Customs to another

>even provincial-level departments in 2011 Besides, the Customs Service has gradually

•eformed its organizational machinery, managed and developed its human resources, built

he organizational machinery for risk management, drug control, and learance control in critical sites It has attentively purchased such modern equipment and

post-customs-technology as container scanners, luggage scanners, electronic scales, cameras, night-vision binoculars

1.1.2 Brief introduction to application of risk management in customs procedure for imported goods

Before its participation in RKC in 1997, the Customs Service had argued that risk management was too modern a managerial method to apply in Vietnam

Between 1997 and 2001, the guideline of Vietnam Communist Party and the State to attract foreign investment in the country resulted in an urgent requirement of simplification of the customs procedures Accordingly, passengers at international airports had been re-channelled into green, yellow and red groups, but the re-channelling was merely technical other than based on the principles and process of risk management; it was quite spontaneous and preliminary

The 2001 Law on Customs provided some contents of risk management in customs, but it was only until when it was amended in 2005 that the concepts of risk management the regulations of risk identification, and measures to settle risks were officialised and specified in Decision 2148/QD-TCHQ dated 3 1 / 1 2 / 2 0 0 5 on issuance of Regulation on application of risk management in customs procedures for commercial imports/exports; Decision 1700/QD-TCHQ, dated 2 5 / 9 / 2 0 0 7 , on "Regulation on application of risk management in customs procedures for commercial imports/exports"; Decision 48/2008/QD-BTC, dated 4 / 7 / 2 0 0 8 by the Minister of Finance, on issuance of Regulation

on application of risk management in customs activities; Decision 35/QD-TCHQ, dated

1 0 / 7 / 2 0 0 9 by the General Director of Customs, detailing and guiding application of risk management in customs procedures for commercial imports/exports Especially, Instruction No 02/CT-BTC dated 0 4 / 8 / 2 0 0 9 by the Minister of Finance, empowers Provincial-level Directors of Customs to direct and take responsibility of construction, management, operation and check of the decentralized risk management system; take responsibility for the quality and effectiveness of risk evaluation' and decide the form and degree of a control To deploy the risk management system, Phase 2, and overcome the limitations, the General Director of Customs issued Decision 15/QD-TCHQ, dated

0 8 / 3 / 2 0 1 1 , to amend Decision 35/QD-TCHQ

After those documents on deployment of risk management had been issued, the General Department of Customs had held many conferences and workshops to introduce and guide risk management for its subordinate departments and staff, and its provincial departments had arranged staff and training courses on foreign languages to train experts

of risk management, post-customs clearance, goods analysis and classification, customs values The provincial departments have all been equipped with a modern computer system with Wide-Area-Network (WAN) to connect with the General Department of Customs, which has spread to the former departments some multi-function technical software such as Export/import Form Management, Tax-Accounting Management (KT559), Tax-calculating Price Management (GTT22), Violation Information Management, Risk Management (Riskman) and has actively coordinated with its foreign partners to advise and support means of risk management

Vietnam's Customs Service has established its three-tier machinery for risk management:

RISK MANAGEMENT DECENTRALISATION

Vietnam Customs

Provincial Customs Departments

Drpartmrnl A

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- The Vietnam Customs has implemented strategic risk management to ensure a service-wide consistency of development and issuance of the set of criteria on risk management; issuance of regulations and instructions on implementation; development, management, operation, and control of the decentralized customs information system and the risk management database; it has met the requirements of security, technical safety, and database secret throughout the service; staff training; coordination with related domestic and foreign agencies and organizations in construction of its database for risk management Its Agency of Anti-trafficking Investigation, in collaboration with the Departments of Post-Customs Clearance, Management Supervision, and Tariff Control, is responsible for making advice and proposals and collecting information and managing operation of risk management throughout the service

- The provincial customs departments have deployed their decentralized risk management plans; constructed, managed, and conducted regular updates of information in their scope of authority in the common database; received information and guided their subordinate units in implementation, and reported the effectiveness to the General Department of Customs; and, coordinated with related agencies to collect information for risk management as decentralized to them

CONTENTS OF DEPARTMENT-LEVEL RISK MANAGEMENT

Information

collection

Risk analysis

Risk management Risk management coordination

^ Updating & managing CoHecting & u p d a t i n g jbnalytical cntena

buamMs mlbrmation^ '

System management and operation

Risk management system

T

Monitonng control and evaluation of nsk management effectiveness

Customs clearance systern

29

- Tactical risk management has been implemented by the provincial sub-departments, internal clearance depots and direct customs officers This level receives and uses information from the database of their provincial departments in combination with other sources of information to select and determine forms of examination; reports to the provincial departments about its management, use and problems arisen during its operation

of the risk management system; and, coordinates w i t h related organizations to collect information for risk management

SUB-DEPARTMENT RISK MANAGEMENT MODEL

Customs d o c

^a<—>m' % ' — '

• • U l R,i< BuslDesses Risk management officers

It is a fact that not every lot of goods is the same and the database does not always has

exact information of lots of imports and importers As a result, the customs must be also based on reality and importers' declarations to arrange sufficient forces and equipment for corresponding customs procedures When more risks are found, they shall report to their respective customs departments for update of information as the basis for risk identification of next imports

After its five-year deployment, the Customs Service has been operating the risk

management system, and its provincial departments have been equipped with skills and information for risk identification The risk analysis division has initially classified causes of risk; the risk evaluation division has initially summarized processed information to provide warnings

of times, size, and degrees of violations of businesses, based on which to estimate possible damages caused by a type of risk The Customs Service has developed an e-information collecting and processing system to identify and evaluate risks in its field, and its officers decide forms of examination based on results of information collection, analysis and evaluation for importers, imports, country of origin, management and priority policies, tariff rates Different departments

31

under the Ministry of Finance and related organizations and individuals have coordinated, exchanged and transferred information for its application of risk management The Customs Service has built a database of businesses for sorting out those conforming to the customs law well; provision of risk criteria for identification of imports to be controlled and those of random examination, objects of tax preferences; analysis and classification of information to identify

i s k y importers, and planning of post-customs clearance and it considered post-customs :Iearance as one task to control risks Based on risk analyses, it also gives exemptions to low-risk mporters

As a result, the number of declaration forms and goods cleared through the green :hannel has been increasing continuously; the steps of customs procedures have been reduced: our steps for the red channel, three for yellow, and two for green The percentage of site examination has reduced from 59.8% in 2005 to 15% in 2010 The customs have had timely liscoveries and warnings of methods, tricks, black imports, and critical objects of control so hat its anti-trafficking and anti-fraudulence have gained many positive results: It has arrested

»,234 cases at the total value of 145.1 billion VND, 12,357 cases at 275.2 billion VND, 12,097 ases at 469.4 billion VND, and, 12,502 cases at 418.3 billion VND in 2007, 2008, 2009, and :010 respectively.*^

Besides, the Customs Service has further deployed risk management in expansion of ustoms procedures Its provincial departments deploy the risk management process hrough e-customs in four steps: (1) risk identification, (2) risk analysis and evaluation, (3) isk settlement, (4) supervision, re-evaluation, and compliance measuring To have effective isk management, the General Department of Customs has organized the risk management lachinery in two levels: the General Department of Customs and the E-Customs Department,

he (Control Reform Taskforce in the Customs Reform Department of the General 'epartment of (Customs is the contact to direct the application of risk management through -customs procedures throughout the service; the risk management division is the contact )r the application of risk management at the e-customs departments Those provincial-level jstoms department applying e-customs procedures shall arrange its subordinate units to

^ordinate w i t h the e-customs departments in application of risk management in e-customs

rocedures

Mjmmary reports, years 2006 2007 2008 200*) \ a 2010 by Vietnam Customs

1.2 The reality of risk management in customs procedure for imported goods at the Customs Department of Quang Ninh Province

1.2.1 The application process

a The deployment

Following the guides by the Ministry of Finance and the General Department of Customs, the Customs Department of Qu^ng Ninh Province have been perfecting its organizational machinery and the mechanism for operation of risk management w i t h gradual improvement of application of analytical criteria for risk management It has also overcome some limitations of the system in risk evaluation and classification, connectivity, data processing ; deployed the programmes and plans for improvement of the risk management system, period 2007-2010 and the years to follow; and, sent many of its risk management staff members to risk management training courses provided by the General Department of Customs

The Department has deployed risk management in customs procedures for imported goods on the following basis:

- The Set of Risk Management Criteria, which includes criteria of evaluation of

importers' conformity to the customs law; risk evaluation for businesses; and, risk evaluation for imports

- The risk management documents of the whole service that serve information :ollection, update, search, and exploitation for risks of commercial imports

- Business management documents for update, analysis and evaluation of a )usiness' process of conformity to the law; search and analysis of business information to

;upport the application of risk management of imports

- The techniques for risk analysis and evaluation for application of risk management

n the customs service

Business management doc Products

O * o f » l ttifomMitton

' ^

ActMUM Corporate flnanc*

Risk scoring

Random choice

HN*®

Vietnam Customs Provincial departments

Conformity monitoring, analysis & evaluation

b Organisational structure

' At the department level, risk management has been perfected and assigned to the

Section on Violation Settlement and Information Collection, which was renamed after trafficking and Violation Settlement on 0 1 / 7 / 2 0 1 0 , and then Risk Management Section on

Anti-1 2 / Anti-1 0 / 2 0 Anti-1 0 The section is the contact for operating the risk management system It functions to develop and submit monthly, quarterly and yearly plans for data collection and application of risk management in the province to the Department Director for approval; assist the Director in guiding and checking data collection and processing and application of risk management, settlement of issues at the sub-departments, and evaluation of risk management throughout the Department; make proposals to complete the organizational machinery and coordination mechanism to realize its tasks, the material facilities and IT infrastructure that serve data collection and process and risk management; coordinates in

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