Definition, Relevance, and Application
Risk management can be defined as “the systematic application of management procedures and practices which provide customs authorities with the necessary information to address movements or consignments that present a risk”. Risk management is one of the seven key principles of trade facilitation.
Risk = Likelihood x Impact
Countries implement risk management systems for purposes of security risk analysis, for instance upon importation of goods. Risk management includes the following aspects:
(e.g. export controls, imports of goods; but also resources, legal and social formation, political objectives etc.)
(i.e. protect revenue, prohibit restrictions, etc.)
(i.e. likelihood of the occurrence of a risk)
|4||Assess and prioritise risks|
(i.e. evaluate impact and consequence of risks occurring)
(i.e. possible countermeasures assigned to level of the risk)
|+||Monitoring, review, documentation, communication & consultation|
“Risk management is essential to target the right shipments to control and ensure a smooth flow of legitimate trade at the same time.”
Many countries still apply physical inspection regimes, which causes delays at borders as well as create opportunities for corruption and informal payments. Risk management and risk-based selectivity enable the allocation of resources to high-risk areas. At the same time, it increases efficiencies in customs clearance for low-risk shipments.
Article 7.4 of the World Trade Organization’s Trade Facilitation Agreement (TFA) requires members to “adopt and maintain risk management system[s] for customs control”. The German Alliance for Trade Facilitation supports the implementation of the TFA with concrete projects.
Risk management is about choices
An effective risk management system would need to develop criteria to assess and react to potential risks. Such criteria may include information on product classification, the trader, country of origin, value of goods and/or mode of transportation. The system would need to identify shipments and goods involving high risks and automatically clear those of lower risk, while maintaining and guaranteeing the same level of protection.
Reduction in times and improvement in controls
A risk management system ensures compliance and reduces the costs and time for customs processes for all parties involved in a trade transaction. Thus, businesses improve their economic competitiveness. At the same time, risk management contributes to the fight against corruption and illegal trade.
Benefits of a risk management system
Increases compliance level of traders while creating incentives to invest in compliance (e.g. AEOs – authorized economic operators). AEOs are companies with a low risk profile, which profit from facilitated import and export processes.
Risk-based selectivity based on digital information technology and automated processes is faster, more consistent in its application and provides for accurate comparison of data. Authorities mitigate risks and ensure a smooth flow of goods at the borders.
Risk management as a trade facilitation project
Projects of the German Alliance for Trade Facilitation help to develop risk management systems in partner countries and advise governments and public authorities on the ground in choosing appropriate selectivity criteria. For trade to flow as smoothly as possible, regulatory measures would need to intervene as little as possible. In other words, the German Alliance supports authorities in their goal to achieve a balance between intervention, on the one hand, and facilitation of trade, on the other.
According to the World Customs Organization (WCO), “an Authorized Economic Operator (AEO) program is a prominent example of [the] balance [between securing and facilitating international trade] whereby [AEOs] reap benefits to their investment in good security systems and practices, including reduced risk-targeting assessments and inspections, and expedited processing of their goods.”
A successful approach to risk management needs to be embedded in the organizational culture of customs authorities. This – according to the WCO – might take several years and needs strong commitment from all levels; hence the importance to apply and make use of monitoring, reviewing processes, assessment, and reporting. Main reasons for non-implementation of risk management systems include, among others, lack of resources to apply such a system nationwide, non-application by other agencies or fiscal evasion.
From 2019–2021, the Indonesian Ministry of Trade and the German Alliance for Trade Facilitation closely collaborated in developing the risk-based approach on import management and documentation. The project piloted a “Trusted Trade Scheme”. Here you can find further information and project results:
Author: Claudia Hofmann, Project Manager, German Alliance for Trade Facilitation
Editor: Pia-Christine Binder, Specialist for Communication, German Alliance for Trade Facilitation
 Revised Kyoto Convention, Preamble. See WCO (2008), International Convention on the Simplification and Harmonization of Customs Procedures (as amended), Text of the Revised Kyoto Convention (Preamble); http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools/conventions/pf_revised_kyoto_conv/kyoto_new/preamble.aspx.
 European Commission, Customs Risk management in details, Taxation and Customs; https://ec.europa.eu/taxation_customs/customs-4/customs-risk-management/customs-risk-management-details_en
 WCO (2021), The International Survey on Customs Administration (ISOCA). Results of the Inaugural Survey; World Customs Organization and IMF Fiscal Affairs Department; http://www.wcoomd.org/-/media/wco/public/global/pdf/about-us/partners/publications/isoca-twg-report_en.pdf?db=web
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