Background

In 2004–05, Australia imported over 7.3 million cargo consignments¹ valued at approximately $149 520 million and the Australian Customs Service (Customs) collected $7 929 million in customs duty and taxes. For the same period, 1.3 million cargo consignments² valued at approximately $126 720 million were exported³. In 2005–06, imports are expected to grow by about 8 per cent and exports by 7 per cent. ⁴

Customs is responsible for regulating the movement of goods and people across our border and collecting customs duty and other revenue. In this context, Customs plays a vital role in preventing illegal and harmful goods from entering Australia. It has to balance this community protection role with the need to ensure the legitimate movement of goods is not unnecessarily impeded.

Not every consignment of goods that enters or leaves Australia represents a risk to Customs' border controls. Customs' experience has been that the vast majority of importations are legitimate. A small number will however contain prohibited and restricted items.⁵ Similarly, most importers will pay the correct customs duty and taxes, with only a small minority misreporting, undervaluing or misdescribing goods to avoid paying duty and/or taxes. Customs adopts a risk management approach and has in place systems and processes for risk assessing, targeting and examining cargo.

Customs advised the cost of all compliance activities in 2004–05 was $91.6 million and involved 455 full time equivalent staff. Customs Compliance Assurance Strategy (CCAS) provides a framework for these activities.

Customs Compliance Assurance Strategy

The CCAS is designed to provide assurance that industry and the international trading community are complying with legislative requirements in an environment that is largely self-regulated. The Strategy is intended to focus resources and activities on areas of risk, with a management and planning structure that is driven by intelligence and analysis. Specifically, the CCAS aims to provide the Government and the community with confidence that:

• reporting of all cargo and vessels entering or leaving Australia is accurate and timely;
• licence and permit requirements, prohibitions and restrictions in relation to imported and exported goods are complied with;
• the correct amount of revenue is paid or identified for collection or consideration;⁶
• community protection programs related to imported and exported goods are effectively implemented; and
• accurate and reliable data on trade statistics is provided to Customs. ⁷

Customs undertakes compliance activities in the international cargo environment in a manner that reflects how cargo moves, the nature of the consignment, who has responsibility for that cargo, and the way clients interact with Customs. Under this approach, the international cargo environment is categorised into four segments: owners; service providers; cargo handlers; and carriers. These segments form the basis for risk assessing clients and consignments, the planning of compliance activity and delivery of compliance programs in the regions by Compliance Assurance teams. Customs' activities are aimed at encouraging compliance. Intervention by Customs is proportional to the assessed level of risk.
The CCAS articulates the increased emphasis being given to undertaking real time compliance activities. This change in focus followed the Business Re engineering Project, which Customs completed in October 2002 to establish the right organisational structure to deliver the Cargo Management Re engineering project.

Audit objective and scope

The objective of the audit was to assess the administrative effectiveness of the CCAS. The audit focused on the following key areas:

• targeting non-compliance;
• real time compliance activity;
• post transaction compliance activity; and
• planning and performance evaluation.

As the imports phase of the Integrated Cargo System (ICS) was only introduced in October 2005, this system was not reviewed as part of the audit. Our audit programme for 2005–06 includes ICS as a potential audit topic.

Targeting Non-Compliance

Industry is required to give Customs advance notice of cargo being imported into Australia.⁸  The timely and accurate reporting of cargo information⁹ is crucial if Customs is to effectively target high-risk consignments and those that do not meet legislative requirements. In an effort to improve cargo reporting Customs implemented its Cargo Reporting Compliance Strategy in April 2003.

Cargo Reporting Compliance Strategy

The strategy initially focused on the timeliness of sea cargo reporting and was extended to include air cargo reporting in March 2004. It involves undertaking exercises to educate and raise awareness, monitoring the performance of reporters to identify non-compliance and developing intervention strategies. The ANAO found that all regions have effectively implemented the strategy.

The ANAO found that the strategy initially improved the timeliness of sea cargo reporting. For those cargo reports received 48 hours prior to vessel arrival, the national average increased from 72 per cent in 2003 to 76 per cent in 2004.¹⁰ However, the legislative change (which came into effect on 13 January 2005) requiring vessels to report prior to arrival at the first Australian port rather than port of discharge, impacted on compliance levels. The national average dropped to 70 per cent in 2005. The timeliness of air cargo reporting improved slightly, with the national average increasing from 78 per cent in 2004 to 81 per cent in 2005.

Customs is extending the focus of the strategy to include the accuracy of reporting. Reporting the movement of cargo also changed in October 2005 with the implementation of ICS and Trade Modernisation legislation. The legislation is designed to provide greater flexibility for industry and to address the problems of late, deficient, inaccurate or non-existent reporting that have undermined Customs ability to risk assess cargo. Changes include mandatory electronic reporting, cascade reporting ¹¹and sanctions for late or inappropriate reports. There is a six month moratorium on applying reporting penalties. Given the extent of these changes, the ANAO considers that the Cargo Reporting Compliance Strategy should be reviewed, 12 to 18 months after the introduction of ICS.

Selecting non-compliant targets

The ANAO found that Customs has well-developed systems and processes for risk assessing and targeting cargo consignments. The information contained in cargo reports, import declarations (or customs entries) and export declarations (EDNs) is assessed to identify high risk and non compliant targets using a combination of risk indicators and system profiles. ¹² Risk profiling and target development are interdependent and rely on high quality and current intelligence.

Intelligence framework

Customs' Intelligence Philosophy sets out what strategic, operational and tactical intelligence is, for whom it is produced and why it is needed. The Risk Identification and Intelligence (RI&I) Branch (in Central Office and the regions) is the focal point for Customs intelligence activity. The ANAO reviewed the intelligence activity that supports the CCAS.

The ANAO found that, although the Compliance Assurance teams and RI&I analysts may have an understanding of the broad risks facing Compliance, there has not been a systematic analysis of the results of compliance activity at the operational and tactical levels to identify risks and emerging trends. To address these issues, Compliance Operations and RI&I in Central Office are undertaking an environmental risk analysis project to assess the compliance risks within the international cargo environment. Although this project is designed to identify risks from a national perspective, the ANAO considers that, where this project identifies risks that are relevant to specific regions, these risks should be evaluated at the regional level and appropriate compliance strategies developed.

RI&I intelligence support

The ANAO found that there was confusion surrounding the roles and responsibilities of RI&I and Compliance Assurance and concern regarding what is perceived as a lack of intelligence support being provided by RI&I to Compliance Assurance teams. Currently, intelligence support involves Compliance Assurance teams tasking RI&I to undertake research for planned audit/compliance activity or into particular industry segments. There is minimal information sharing between the two groups.

Compliance Assurance teams provide little feedback to RI&I analysts on any of the work they undertake or the compliance activities completed as part of the CCAS. The current approach is fragmented and is not meeting the expectations of either Compliance Assurance or RI&I.

To address these concerns, the Victorian region has undertaken joint risk assessment and planning workshops to develop their 2005–06 work programs and outposted RI&I officers to work with the Compliance Assurance teams. The ANAO suggests that other regions consider adopting this approach. Formal feedback mechanisms should also be established so that the results of all compliance activity are analysed and incorporated into intelligence assessments, profiles and planning processes.

Real Time Compliance Activity

The CCAS includes undertaking compliance activities in real time. This involves Customs risk assessing the information provided in import declarations, EDNs and unaccompanied personal effects (UPE) ¹³ statements as they are received. Customs then determines whether the cargo will be released immediately or if further verification/examination is required.

Real time assessments

The ANAO considers that Customs has well-developed systems and processes for assessing and examining import declarations in real time. When an import declaration is received, the cargo data is matched against compliance risk profiles ¹⁴ and sorted into two groups: green or red line entries. Green line entries are automatically cleared whereas a hold is placed on red line entries preventing the goods from being released. In 2004–05, Customs received 3.5 million entries, of which approximately 65 000 (1.9 per cent) were red line. The ANAO attempted to further analyse the volume and value of red line transactions. However, this data was not readily available and Customs expressed reservations about the accuracy of the data set.

Generally, UPE statements are lodged with Customs manually. Although these are not matched against Customs' electronic risk profiles, the regions assess all statements against specific risk criteria. The ANAO identified significant inconsistencies in UPE data and, as a result, was unable to undertake any valid analysis. Given that considerable resources are devoted to assessing and examining UPEs, the ANAO considers it is important that Customs determines a reliable data set so that it may assess the risks posed by UPEs to confirm that the level of compliance activity is appropriate.

Export declarations are submitted in ICS. If an EDN matches a risk profile, it will be evaluated by the relevant workgroup to determine whether the cargo is held, released for export or if further documentation/examination is necessary. Customs reviewed the implementation of the exports release of ICS in November 2004 and found the implementation was relatively successful. However, the review identified three key problems: a number of system defects; incorrect reporting practices; and deficiencies within Customs' support arrangements. The ANAO found that Customs has reinforced to clients the importance of reporting cargo correctly, revised its support arrangements and is addressing system defects.

Mass Screening Intervention Strategy

The mass screening ¹⁵ of air cargo consignments is also carried out in real time. The Government initiated this intervention strategy as part of its continuing effort to prevent the importation of prohibited and illicit goods, particularly firearms. From July 2002, 70 per cent (nationally) of all imported air cargo consignments are to be mass screened. The ANAO reviewed the strategy's intervention rate. Reliable data was not collected prior to 1 July 2004 and the ANAO found that, for 2004–05, Customs met the 70 per cent intervention target nationally.

Recording and reporting examination results

The ANAO found that it is currently very difficult to access and analyse the outcomes of compliance related examinations. The Examination Data Management (EXAMS) system does not record the workgroup requesting the examination and the business rules and procedures do not clearly define how positive finds are to be recorded. The ANAO considers that capturing examination results is important for evaluating trends, identifying emerging patterns of non-compliance and assessing profile effectiveness. At present, Customs does not analyse or effectively use the data retained in the EXAMS system or regional databases. If examination results are to be accurately and consistently reported and analysed, it is important that Customs: identifies specific compliance workgroups requesting examinations; and develops and implements ‘compliance specific' business rules and procedures, particularly in relation to how a positive find is categorised.

Post Transaction Compliance Activity

The CCAS also monitors the compliance of industry segments and individual clients in a post transaction context. Activities include audits of individual clients and compliance checks of Customs' licensed premises. Post transaction audits evaluate industry practices and records to assess the integrity of the information provided to Customs. Compliance checks of licensed premises validate that the receipt, movement and release of goods was in accordance with legislation and correctly recorded.

Post transaction audit activity

Compliance audit activity includes focused, benchmark and desktop audits.¹⁶ The ANAO found that the audit planning process was often based on officer knowledge, experience and intuition and did not include a formal assessment of risks or the level of confidence in the client's ability to comply. The ANAO analysed an indicative sample of 65 compliance audits covering all regions and found: 25 audits did not have internal reports; audit outcomes were not evaluated; and very few identified follow-up visits were programmed.

The ANAO reviewed the number of audits completed during 2003–04 and 2004–05 and found considerable variation between the audits the regions advised they had completed and those recorded by Central Office. Based on regional data, the ANAO found there was a reduction in audit activity in 2004–05, this was predominantly focused audits. All regions indicated that a lack of resources had impacted on their ability to complete their audit programs and priority was given to benchmark audits. In response, the Victorian region developed a Desktop Audit Program to enable, within existing staffing levels, a greater coverage of industry segments and clients. The ANAO considers that other regions may benefit from introducing a similar program.

Non compliance identified through audit activity generally relates to the non payment or incorrect calculation of customs duty and/or taxes. The duty adjustments as a result of audit activity for 2004–05 were $1.3 million underpaid and $63 402 overpaid. Customs was unable to provide details of the penalties and infringement notices issued during this period because of data migration problems between the Interim Penalties System and the Penalties System (Version 2).

Compliance activities relating to licensed premises

Customs' licensing system enables importers and owners of imported goods to defer the duty payable on these goods by storing them in Customs' licensed warehouses until they are ready to be entered into home consumption or exported. Cargo depots may also be granted a license to hold, pack, unpack, and/or examine imported goods and export cargo, which is subject to Customs control. As part of CCAS, Compliance Assurance teams undertake compliance checks of these premises.

The ANAO found the frequency of compliance visits, the number and type of checks and the entries/lines sampled varies across regions. The regions generally developed their own visitation programs for licensed premises. Most warehouses and depots were risk rated although Customs advised that, for some, this rating was more intuitive than analytical. The ANAO was advised that these programs were not always completed because of a lack of resources. There is also considerable variation in recording the results of compliance checks.

Central Office is not advised of the results of these compliance checks and the regions do not evaluate them. As a consequence, there is little understanding, particularly nationally, of how compliant licensed premises are, the compliance issues relating to them or if there is consistency across regions when undertaking these checks. Although standard operating procedures have been developed, there is no national compliance strategy for licensed premises. To better coordinate and manage the compliance activities relating to licensed premises, the ANAO considers Compliance Operations should develop a national compliance strategy.

Planning and Performance Evaluation

It is important that Customs has an effective framework for planning, monitoring and evaluating the effectiveness of its compliance activities. The ANAO found that Customs' Planning and Performance Framework is well designed and ensures plans are aligned and mutually supportive. The National Compliance Business Plan identifies compliance risks and reflects national priorities. Regional Work Area Plans incorporate these risks, identify regional priorities and outline the activities to be completed as part of the CCAS.

The CCAS is also prioritised and endorsed by the National Priorities Committee (NPC) and Regional Priorities Committees (RPCs) ratify regional compliance assurance programs. The ANAO found that these committees are not providing the direction and oversight envisaged when they were initially established. Customs advised that it is considering undertaking a formal review of the NPC. The ANAO considers that such a review would be beneficial, particularly as the NPC has considerable influence on the direction of the CCAS and the intelligence capacity that supports it.

The Victorian region has recently put forward a number of suggestions to raise the profile of the NPC/RPC relationship and to more effectively align intelligence and compliance resources. The ANAO considers that it would be worthwhile to include in the scope of the NPC review an assessment of the approach being adopted by the Victorian RPC. If considered appropriate, the model could be implemented nationally.

Evaluating the effectiveness of compliance activities

Customs found it difficult to provide the ANAO with accurate and reliable compliance data. Data relating to compliance activities is recorded in a number of systems and regional databases, as there is no national system. The ANAO noted a range of data integrity problems relating to the data recorded in these databases. This means that accurate and reliable data is not readily available or being used to evaluate the effectiveness of CCAS compliance activities or as a basis for management decisions. The ANAO found that, with the exception of the Compliance Benchmark Testing (CBT) Program, there is no systematic analysis of compliance data by either Central Office or most regions. As a consequence, compliance trends or patterns of non compliant behaviour within or across industry segments may not be identified.

Compliance Benchmark Testing Program

Customs introduced its CBT Program in 2001–02. It is a statistical program of randomly selected company audits designed to estimate rates of compliance with Customs import and export entry-reporting requirements. In 2003–04, the maximum estimated revenue leakage¹⁷  for customs duty was $18.8 million (0.38 per cent of total duty collected) and for the Goods and Services Tax (GST) was $55.4 million (0.41 per cent of total GST collected).

The ANAO considers the benchmark program is a useful mechanism for estimating industry compliance. However, as the tobacco, alcohol and petroleum industries do not lend themselves to benchmark audits, the program should include a ‘gap analysis'¹⁸ for these segments. As the Australian Taxation Office (ATO) also completes revenue assessments for these industries, Customs should, where appropriate, undertake this work in conjunction with the ATO.

Overall Conclusion

Australia's international trading environment is complex, involves multiple industry participants and is largely self-regulated. Customs adopts an appropriate risk management approach and has developed and implemented systems and processes to risk assess and target high-risk consignments and non compliant behaviour. Customs also monitors and, where necessary, enforces compliance with legislative requirements through the compliance activities of the CCAS. These compliance activities are undertaken in a real time and post transaction context. Intervention strategies to address non compliance are tailored to the nature and extent of the risk involved.

The ANAO found that Customs' ability to target non-compliance is undermined by a lack of systematic analysis of risks and emerging trends. The intelligence support being provided to the CCAS is also reduced by inadequate feedback mechanisms and information sharing. Customs intelligence capacity would be enhanced if compliance activities were evaluated and the results of these activities fed into intelligence assessments.

The audit also highlighted significant data capture and data integrity problems. Accurate and reliable compliance data is not readily available or being used to evaluate the effectiveness of CCAS compliance activities or as a basis for management decision-making. Currently, Customs does not evaluate its compliance activities other than undertaking its CBT Program.

Customs is putting in place a number of initiatives to strengthen its targeting and risk identification strategies. For example, the environmental risk analysis project is designed to identify and assess risks within the international cargo environment. Improved intelligence and information sharing arrangements are also being developed. Customs is working to address its data integrity issues so that it can properly evaluate compliance activities and provide assurance that the CCAS is meeting its objectives. The ANAO has made nine recommendations aimed at improving the operational and administrative effectiveness of the CCAS.

Agency Response

Customs welcomes the report and has agreed with all the recommendations. The audit has been of considerable benefit to Customs. The reduction of resources undertaking Compliance activities in recent years has been a key contributor to many of the issues identified in the report. The additional resources received for compliance activity in the 2005–06 Budget is enabling us to address many of the issues. Action to implement the recommendations is already underway and Customs is sure this will facilitate further improvements in compliance activities.

Footnotes

1 Generally, the size of import consignments are smaller with fewer bulk commodities compared to exports. Exports have a higher proportion of high value consignments.

2 Figure is based on the number of export declarations issued.

3 Australian Customs Service, Customs Figures Australian Customs Service Quarterly Statistical Bulletin June 2005, Issue 39, pp. 15, 27, 29, 32, 60, 63.

4 Budget Paper No. 1, Statement 3: Economic Outlook, Overview [Internet]. Australian Government Budget 2005–06, available from <http://www.budget.gov.au/2005-06/bpl/html/bst3-02.htm&gt; [accessed 18 July 2005].

5 Prohibited and restricted items include: illicit drugs; weapons; pornography; unsafe products; therapeutic goods; wildlife; quarantine items; and items that breach intellectual property rights.

6 Consideration is where a liability has been established but the duty and/or taxes have not been collected such as the deferred Goods and Services Tax.

7 Australian Customs Service, Customs Compliance Assurance Strategy, p.2.

8 Under the Customs Legislation Amendment (Airports, Ports and Cargo Security) Act 2004, sea cargo must be reported 48 hours prior to the vessel's arrival at the first Australian port and air cargo two hours before arrival at the first Australian airport.

9 Cargo is reported by owners, service providers and carriers.

10 When the strategy began the focus was to improve reporting in preparation for ICS and this was to be 24 hours prior to vessel arrival at the port of discharge. The national average for cargo reports received 24 hours prior to vessel arrival increased from 85 per cent in 2003 to 87 per cent in 2004.

11 Cascade reporting allows cargo reporters to nominate other parties who will be responsible for providing further cargo report details.

12 Risk indicators can be information such as the origin of the consignment, the port of loading or description of the cargo, which alone, or in combination, suggests a consignment presents a risk. Risk indicators are the basis for developing system profiles.

13 UPEs are personal or household items that are over 12 months old, excluding motor vehicles, that are imported by, but arrive separately from, a passenger when travelling to Australia.

14 At the time of the audit import declarations were only submitted through the Customs Online Method of Preparing from Invoices Lodgeable Entries (COMPILE) system.

15 Mass-screening is only undertaken in the air environment and refers to air cargo consignments that have been subject to either x ray, visual inspection, physical examination or inspection by Customs' detector dogs.

16 Focused audits are aimed at assessing areas where there is a perceived medium to high level of risk. Benchmark audits are randomly selected as part of Customs' Compliance Benchmark Testing Program to verify compliance industry wide and provide assurance in terms of revenue leakage and data integrity. Desktop audits are document verification checks of nominated transactions.

17 Revenue leakage is an estimate of the total amount of uncollected revenue as a result of incorrect payments/declarations or other breaches of the legislative requirements.

18 A ‘gap analysis' compares the quantity of a commodity available from source versus the quantity of that commodity used or consumed in some way. Any difference or ‘gap' is likely to correspond to unreported uses, such as illegal activities.