From Reactive Compliance to Proactive Customs Risk Management

Executive Summary

The reaggent approach in customs compliance is based on interfering with problems that occur mostly in realised operations.

Proactive approach focuses on determining and controlling risks before or within the process.

The following elements are important in the transition of companies to proactive customs risk management:

1. Identification of customs risks at corporate level.
2. Determination of Critical product, supplier and processing groups.
3. Creation of risk-based control mechanisms.
4. Evaluation of customs, finance, purchasing and production data together.
5. Development of early warning indicators.
6. Performing regular customs internal audits.
7. systematic monitoring of regulatory changes.
8. Reporting critical risks to the top management.
9. Measuring the effectiveness of corrective activities.
10. Creation of continuous improvement culture.

Proactive approach does not guarantee that all risks will be completely eliminated.

However, it can support the early determination of risks and the development of the company’s control capacity.

1. What Is Reactive Customs Compliance?

Reactive customs compliance is the management approach that the company has addressed after the problem is determined.

For example;

• the request of disclosure from the customs administration,
• post-clearance audit start,
• detection of the use of the wrong GTIP,
• the emergence of missing tax risk,
• determination of incompatibleness in special regime operations

After the required evaluations, the reaggent approach can be examples.

In this approach, the company focuses on the solution of the existing problem.

However, when the problem has been sufficiently evaluated, how similar errors are avoided, the same risks can be repeated.

Reactive intervention may be necessary and inevitable in certain situations.

The problem is that the reagent intervention becomes the only adapting mechanism of the company.

2. What is Proactive Customs Risk Management?

Proactive customs risk management is the approach aimed at determining, evaluating and managing the risks that may be caused by customs transactions.

In this approach, the company does not only examine past operations.

It also follows changes that may affect the processes to be performed in the future.

For example;

• GTIP assessment before importing a new product,
• Review of risks of origin and trade policy for new suppliers,
• Evaluation of the royalty contract in terms of customs value,
• pre-checking process of end-term price corrections,
• Regular monitoring of consumption differences in Processing Rejimi

sample can be shown in proactive applications.

The main purpose here is to reduce the possibility of occurrence of errors before managing the results of errors.

3. Differences Between Reactive and Proactive Approach

This comparison was prepared to explain in-house management approaches.

Reactive and proactive controls can be found in real application.

4. Why does companies stay in the Reactive Compliance Approach?

The companies may have different reasons to remain in the reagection approach.

Operational priorities

Foreign trade departments can focus on completing daily shipment and customs transactions on time.

This density can limit the time allocated to systematic risk analysis.

Lack of coordination between departments

The information that affects the customs transactions can be found in different units.

This information is not regular sharing, it can make it difficult for the early determination of risks.

Data quality problems

Keeping GTİP in different systems of origin, asset and stock data, can strengthen the analysis of the holistic.

Limited of management visibility

Only operational evaluation of customs risks can make it difficult to prioritize strategic control investments.

Insufficiency of control mechanisms

Even if there are controls for certain operations in companies, these controls are not systematically designed, they can cause the risk back.

5. First Step of Proactive Approach: Risk Inventory

The starting point of proactive customs risk management is the determination of important risks that the company may encounter.

When creating risk inventory;

• GTIP classification,
• customs clearance,
• origin,
• trade policy measures,
• import taxes,
• special customs regimes,
• export controls,
• document and registration management

areas can be evaluated.

However, the risk profile of each company is not the same.

For example, transfer pricing and customs clearance may be important in a business that imports high volume associated company.

In a manufacturer using Processing Rejimi, stock, price and export commitments can be found among the primary risk areas.

Therefore, risk inventory should be created according to the actual activities of the company.

6. Priority of Risks

All customs risks may not have the same importance.

When companies prioritize the risks;

• possible financial effect,
• repeat frequency of transactions,
• legislation complexity,
• effectiveness of existing control mechanisms,
• operational results

you can take into account.

For example, the risk of systematic GTIP error in a high-volume product group can create greater financial impact than a low volume of individual document deficiency.

However, a low volume process can also carry critical risk according to the legal nature.

Therefore, the risk ranking based solely on the trading amount may not be enough.

7. How to Install Early Warning System?

The early warning system is based on the monitoring of certain risk indicators and notification of important changes to the relevant responsibilities.

For example;

• new GTIP definition,
• change of the technical characteristics of the product,
• addition to new suppliers,
• change of origin information,
• signed a new royalty contract,
• end-end price correction,
• approaching the duration of the special regime document

early alert triggers can be determined.

However, each trigger does not necessarily mean there is a violation of the legislation.

The purpose of early warning is to make changes that require assessment appear on time.

8. Proactive Control in GTIP Risks

GTİP classification may have significant impact on import taxes and trading policy measures.

GTIP control in a proactive system is not only at the stage of customs declaration.

The new product is reevaluated when defined or changing the technical specifications of the existing product.

For example, when the company’s product development department prepared a new model, this product can be controlled and classified under the existing GTIP.

This approach can help prevent faulty classification from repeating in a large number of processes.

9. Proactive Control in Customs Contract

The risks of customs clearance are often linked to commercial contracts and financial transactions.

Therefore, it may not only be enough to check import bills.

In a proactive approach;

• new license contracts,
• royalty payments,
• related company operations,
• price corrections,
• certain commissions,
• additives linked to imported goods

is evaluated in terms of the relevant legislation.

However, it should not be assumed that every payment or contract affects the customs value.

The important thing is to determine the processes that require assessment in time.

10. Proactive Control in Risks of Origin

Risks can be caused by changes in supplier or production structure in origin applications.

For example, changing the production facility of a supplier may affect the evaluation of the origin of certain products.

It is important to meet the relevant terms of origin in the processes that are used in similarly preferential trade agreements.

Within the scope of proactive control;

• supplier of declarations,
• proof of origin documents,
• production place changes,
• preferably trade conditions

can be evaluated regularly.

However, the document does not automatically prove that the relevant conditions of origin are met in any case.

11. Proactive Control in special customs procedures

Time in private customs regimes, conditions of permission and related obligations are important risk areas.

For example, within the scope of Processing Rejimi in Included;

• document times,
• import and export quantities,
• cash rates,
• production prescriptions,
• stock movements,
• closing operations

can be monitored regularly.

This approach can reduce the risk of realizing problems only in the closing phase.

However, the controls to be applied should be determined according to the legal conditions of the corresponding regime.

12. How to Support Data Analytics Customs Risk Management?

Import and export operations of companies produce significant amount of data.

This data can be used to detect certain risk indicators.

For example, with data analysis;

• use of different GTIP for the same product,
• imported similar products from the same supplier with different assets,
• unexplained changes of origin,
• unusual unit price differences,
• document duration upcoming custom regime operations

can be determined.

However, the results of data analytics should not be considered to be a violation of the legislation alone.

Analytical indicators help determine the processes requiring expert review.

Therefore, legal and technical evaluation processes should be used together with automatic risk detection systems.

13. Place of Customs Internal Inspection in Proactive System

Customs internal control is one of the important components of proactive risk management.

Thanks to regular internal audits;

• effectiveness of existing controls,
• systematic error risks,
• reliability of records,
• information sharing between departments,
• Results of corrective activities

can be assessed.

However, it is not enough to list only past errors of internal audit.

The root causes of the findings should be determined and the controls to prevent the occurrence of similar errors in the future should be designed.

Therefore, self-audit studies should be part of the continuous improvement mechanism.

14. Systematic Tracking of Legislation Changes

Customs legislation and foreign trade regulations may vary in time.

GTİP classifications, tax rates, trading policy measures and special regime conditions can be updated in different periods.

For this reason, the company may not be enough to review the legislation changes only when the need arises.

In a proactive system;

1. The relevant legislation resources are determined.
2. Changes are monitored regularly.
3. The impact of the company's operations is evaluated.
4. The relevant departments are informed.
5. Required system and procedure updates are made.
6. The application is completed and controlled.

This approach can support the timely reflection of legislation changes to operational processes.

15. Role of Top Management in Customs Risk Management

Proactive risk management is not only dependent on the technical capacity of the foreign trade department.

The coordination and management support of different departments of the company are also important.

Top management;

• to make critical risks appear,
• determination of duties and responsibilities,
• provision of necessary resources,
• evaluation of internal audit results,
• Monitoring of corrective activities

support.

However, the organization structure and legal responsibilities of each company may be different.

Therefore, management and control mechanisms must be designed according to the company's operating structure.

C-INSPEC Perspective

Asıl Transformation in Customs Compliance is Changing the Time of Control

Studies on customs compliance in companies often begin with the study of past transactions.

An error is detected, the related processes are evaluated and the necessary corrective activities are planned.

Although this approach is necessary in certain circumstances, the company may not always prevent the encounter with the same types of risks.

For example, correction of a product classification used in the wrong GTIP is an important step.

However, if a reliable control mechanism is not created for classification of new products, similar errors may appear again.

Similarly, the evaluation of royalty payments in terms of past transactions may not be enough if new contracts are not set up a process that provides timely examination in terms of customs value.

For this reason, proactive customs risk management in the C-INSPEC approach does not mean only more inspection.

The main goal is to be included in the commercial decision processes of the company.

Evaluation of import costs before the purchase decision is made, the verification of the GTIP before the product is imported, and the inspection of precious risks before the contract is applied is the basic examples of this approach.

Thus, customs compliance can turn into a corporate management mechanism that supports the reliability of commercial decisions by being controlled after the operations are completed.

The purpose of proactive customs compliance is to systematically reduce the possibility of emergence of future errors, not to find errors in the past faster.

16. 90 Daily Proactive Compliance Road Map For Companies

The following plan is a sample application model that can be adapted according to the company's trading volume and risk profile.

First 30 Days — Current Status and Risk Analysis

At this stage;

• existing customs processes are reviewed,
• critical products and suppliers are determined,
• history audit findings are evaluated,
• data sources are mapped,
• primary risk areas are detected.

The aim is to understand the current compliance capacity of the company and important risks.

31–60. Days — Control Design

At this stage;

• critical control points are determined,
• duties and responsibilities are defined,
• change notification processes are created,
• early warning indicators are developed,
• control and reporting procedures are prepared.

The purpose is to create control mechanisms that can be applied to designated risks.

61–90. Days — Application and Monitoring

At this stage;

• priority controls are applied,
• training is given to the relevant staff,
• tests are carried out through sample operations,
• the first risk report is prepared,
• open actions are followed.

The purpose is to integrate the designed controls into the daily business processes.

This calendar is recommended. There may be longer application times in companies with complex operating structure.

17. Sample Control Matri for Proactive Customs Risk Management

This matrix is an example frame for corporate control design.

18. Proactive Risk Indicators For Top Management

It may not be enough to monitor only the number of realised issues in proactive risk management.

Indications for the prevention of risks should also be evaluated.

For example;

These indicators are recommended for internal risk management; not a mandatory reporting format for all companies.

19. Frequent Errors in Proactive Compliance System

The approaches to which companies need to avoid are:

1. Limit risk management only with the examination of past declarations.
2. Not to design controls according to the real risk profile of the company.
3. Do not add customs control to new product and supplier processes.
4. Manage financial transactions individually from customs asset assessments.
5. We do not regularly follow the changes of origin and trade policy.
6. To accept precise error without expert assessment of the results of data analytics.
7. Personally contact the sharing of information between departments.
8. Don’t report critical risks to top management.
9. Do not measure the effectiveness of corrective activities.
10. Evaluate compliance program as one-time project.

The removal of these deficiencies can help the company to improve its proactive risk management capacity.

Frequently Asked Questions

Conclusion

The customs compliance should not be limited only to controlling and solving the problems that arise.

The complex structure of international trade makes it important to determine and manage the risks of companies in the early stage.

Proactive customs risk management is a corporate approach that combines risk analysis, preventive controls, data analytics, internal audit, legislation tracking and management surveillance.

In order to succeed this approach, customs compliance should be integrated into the company’s purchasing, finance, production and other related business processes.

However, proactive compliance should not be seen as a mechanism that completely eliminates all risks.

The main purpose is to determine the risks earlier and to continuously improve the company’s control capacity.

Sustainable transformation in customs compliance is to create a corporate management system that prevents problems from being revealed before solving issues faster.

Legislation and Official Sources

1. Customs Law No. 4458.
2. Customs Regulation.
3. Then Control Regulation of Control and Risk Procedures.
4. Ease Regulation of Customs Operations.
5. Ministry of Commerce — the official explanations on customs transactions, risk management and audit applications.
6. World Customs Organization — Guidelines for risk management and customs compliance.
7. ISO 31000 — Risk management principles and guidance approach.