Enforcement and Recognition

The “Carrot and the Stick Approach” sits at the top of the Risk-based Compliance Management Pyramid (refer to Diagram 1) that addresses enforcement and recognition. A structured gradual approach to enforcement with escalating responses by Customs for offenses, and continuing non- compliance, represents the stick. A similar approach, with a gradual increase in facilitation rights for high compliance, represents the carrot.

The actions at the top of the pyramid are able to be undertaken thanks to the legislative foundations identified at the bottom of the pyramid.

The concept of Compliance Management is structured on a willingness of the trade to be compliant; Customs assists them in their efforts to comply. Once identified, and confirmed as having high levels of compliance, these entities can be rewarded in a number of ways within the scope of the legislation.

Currently, Pakistan Customs is unable to accurately identify, and provide evidence of, entities that are either compliant or not compliant.

7.4.1 Enforcement Possibilities

The Pakistan Customs Act, although robust in many of its penalty options for offenses, is outdated in others. Some of the penalty options are set at a specific amount of Rupees for the offense, and others offer an opportunity to penalize an amount up to five times the revenue avoided, or at risk.

There is no documented, agreed policy or procedure which outlines how Customs will apply penalties. In addition, no set policy as to under which circumstances it will apply a penalty is evident. It appears the unwritten procedure is to allow up to a 30% discrepancy before applying a penalty. While this is a good approach, it is not sanctioned formally, and is therefore open to abuse. Also, depending on the value of the consignment, a 30% discrepancy could represent a significant amount of revenue loss. Compliance Management allows a degree of flexibility for offenses that occur due to human error, or events perceived to be a “one-off”. Therefore, elements such as persuasion, or formal warnings, play an important part in Compliance Management.

In the event that an audit identifies a number of errors due to poor accounting records of an entity, Customs can suggest procedural improvements to rectify. This could be in the form of education, or a warning, rather than a strict penalty application. Should the mistakes continue and the recommendations of Customs are ignored, then the next alternative would be to escalate to penalties.

The above is an acceptable action for minor errors and discrepancies. In the event of blatant fraud or large errors in excess of 30%, then a strict penalty regime should be initiated in the first instance. Subsequently, action should continue to a stage where, if there is no change in attitude, or no real attempt to comply, investigation and prosecution should be initiated.

In Pakistan many penalties are appealed to the court, and claims of indiscriminate harassment are common. This is usually refuted by Customs, which nonetheless often finds itself in court without sufficient evidence to support its actions. This is due to a lack of record-keeping, or the fact that previous indiscretions were not dealt with in accordance to the legislation. If these offenses and indiscretions are not being reported and recorded by the intelligence system and profile performance monitoring unit, the perpetrator can continue to operate without fear of being brought to account.

Recommendation 43

It is recommended that Customs introduce a formal documented offense reporting regime, which must be reviewed on all occasions prior to making decisions on application of a formal warning, a penalty, or pursuing a prosecution.

This system must be nationally consistent in its application, and recorded in a national intelligence database of offenders that is accessible by all officers. This will assist in dealing with offenders who choose to “port jump” to avoid detection.

This recommendation reinforces recommendation 22, promoting the need for a national intelligence database that will be accessible to all staff, for research and analysis activities.

7.4.2 Facilitation Rights in Recognition of High Compliance

As customs administrations evolve and improve their systems and processes, the ability to introduce trade facilitation initiatives improves as well. These benefits are offered when entities have established good, or acceptable, levels of compliance and display an ongoing commitment to work in close consultation with Customs to ensure improvements.

In the context of reward, or recognition, for high compliance levels, Pakistan Customs does not currently have a formal facilitation program to provide simplified, or expedited, clearance.

There is a lack of understanding within Pakistan Customs of the actual nature of trade facilitation, and further, the instruments that Customs can use to facilitate trade. Pakistan Customs considers trade facilitation to be reflected in its use of the “Green Channel”.

The current ratio of Green, Yellow and Red interventions provide no evidence of trade facilitation. The current ratio indicates that for every four declarations presented, there is a probability that one will go to Green, two to Yellow and one to Red. This is clearly not Trade Facilitation, and it is also not Risk Managementper international best practice.

Trade Facilitation measures to be offered by Customs administrations are legally supported instruments providing specific facilitative measures to those entities that have a proven record of high compliance. These mechanisms come in a variety of different forms such as: Trusted Trader Programs; pre-arrival clearance facilities; deferred payment of duty liabilities (e.g., up to 30 days); self-assessment with lodgement and payment of declarations on a quarterly basis; acceptance of “prudential audit” for compliance; self-regulation authority; and approved Authorized Economic Operator status.

In order to establish a formal trade facilitation program, it is important to identify those who would be the best candidates, and most willing to cooperate with Customs requirements. Those entities that represent the bulk of the trade, either by volume or value, should be approached first to participate in a compliance assessment program which would aim to confirm their suitability and eligibility for any agreed privileges.

It is recommended that Customs identify the top 20 entities according to trade volume to engage and establish a pilot compliance-based trusted trader program. Initially 5 to10 entities would be the anticipated number for this pilot program.

A trusted trader program can have a variety of incentives similar to those identified above. The key factor is a willingness to cooperate with post clearance auditors on an ongoing basis to ensure continued high levels of compliance. In an environment such as that of Pakistan Customs, which has a lack of effective PCA capacity, the above recommendation cannot be implemented overnight, but needs to follow a gradual approach to implementation.