Public Disclosure Authorized SOU T H A SIA P OLIC Y N OTE S A D VA N C IN G R E GION A L IN JULY TE GRATI 2015  ON 4 |  ISSUE 1 99492 Public Disclosure Authorized The Security and Trade Facilitation Nexus: Options for South Asian Countries Clay Kerswell and Charles Kunaka Trade Facilitation Does Not Have to Identifying the Nature of Security Threats Undermine Security Accepting that no country can conduct a 100 percent A previous SARConnect note (Issue 3) examined a range of physical inspection regime capable of identifying all security risks points to the need to conduct targeting and profiling. Public Disclosure Authorized international recommendations and approaches to border security. It also discussed how security concerns have However, before that process can begin, there should be an prevented progress in trade and transit facilitation in South articulation of the exact nature of the risk and how it would Asia. So far, trade facilitation initiatives have been unable manifest itself in an international trade transaction. While the to address these concerns. Unless viable initiatives are contemporary focus has been on threats relating to terrorism, proposed that recognize the security risks faced by individ- there are others, including environmental and societal risks. ual countries, it is unlikely that the inefficient approaches Depending on the nature of the threat and the type of to border management will be changed to better facilitate transaction and transport, the ability to profile risk and the international trade. type of potential risk-mitigation intervention will be different. Despite widespread understanding that poor trade If the predominant risk is economic (undervaluation, for facilitation performance detracts from national competitive- instance), a certain set of transactional data can help ness, implementing meaningful change in the culture of profile and identify high-risk targets. In such cases, physical control that dominates border management institutions in inspection responses would be not be as effective as con- the region is not an easy task. Yet, evidence from interna- ducting post-transaction auditing as the main compliance strategy.2 A simplified representation of an approach to this Public Disclosure Authorized tional border management reform programs shows that the apparently contradictory objectives of trade facilitation and threat/response analysis is depicted in the Table 1. border control are, in fact, two sides of the same coin, and can be accomplished through well-designed and effectively • Risk identification and assessment is an important implemented reform and modernization programs. initial step in developing and improving the security As highlighted in the earlier SARConnect note, imple- response by South Asian border management mentation of international conventions and treaties such agencies. as the World Trade Organization (WTO) Trade Facilitation Agreement (TFA) should not be seen as a threat to Broadening, Deepening and Layering improved border security, but rather as a practical step These practices are the basis of contemporary sup- South Asian countries could take to achieve improved levels ply-chain-security initiatives. They are part of an approach of trade facilitation and security.1 Below are some other where border regulation starts earlier and captures data key strategic reforms that, based on the experience of The from more sources while using multiple levels and methods World Bank Group and development partners active in of verification. They require an ability to access existing South Asia, are considered fundamental to achieving this electronic data throughout the supply chain to identify risk outcome. factors at an early stage. www.worldbank.org/southasia 2 S O UT H A S I A POL IC Y N OT ES A D VAN C IN G R E GION A L IN TE GR ATION TABLE 1. Approaches to Different Risks in Trade Facilitation Threat / Risk Revenue Security / Community Protection Smuggling Health/Safety Response (including misclassification) Undervaluation Weapons SPS (standards & conformity) IPR Inspection ✓ ✗ ✓ ✓ ✓ ✓ Scanning ✓ ✗ ✓ ✗ ✗ ✗ Documentary ✗ ✓ ✗ ✓ ✓ ✓ Post-Audit ✗ ✓ ✗ ✗ ✓ ✓ Supply Chain Security ✓ ✓ ✓ ✓ ✓ ✓ Source: Author’s compilation. SPS: Sanitary and Phyto-sanitary Standards; IPR: Intellectual Property Rights. Supply-chain security is based on the understanding assessed more closely, particularly with regard to costs that industry has an equally strong financial interest in and benefits. the security and visibility of goods, and is generally better Scanning via an X-ray or gamma ray to identify the placed to recognize what is “normal” behaviour as goods contents of shipments (Figure 1) is often promoted as the move through the supply chain.3 Importantly for regulators, it “magic bullet” solution to security. While this technology recognises that risks attach to the entire supply chain based can be very effective in certain circumstances, international on the risk of the weakest node or link.4 experience suggests expectations often exceed results. Another important element of the supply chain security The most commonly publicized successes tend to relate approach to improving border security is the Authorized to identification of smuggled products attracting high rates Economic Operator (AEO).5 This strategy goes beyond of duty – products that are most amenable to identification the traditional transactional approach to compliance and through scanning because of their composition. looks at the risks posed by cross-border transactions at Scanners are most useful as a source of additional data an institutional level. AEO programs take advantage of when images are interpreted by a trained analyst. However, private-sector resources to improve supply-chain security even then, the physical composition of some shipments and consider the ability of an entity to comply along its (including their density and mechanical complexity) and entire supply chain. That includes processes and systems other variables can limit the effectiveness of scanning. For to ensure control, both for the entity’s own commercial example, some types of goods can shield contraband from operations and those of its partners and stakeholders. Such effective scanning, producing an image that cannot be schemes also enable regulators to direct their resources to easily analysed. Many administrations continue to X-ray all high-risk operators or transactions. Of particular importance shipments, even when experience shows a usable image to improving intra-regional connectivity and trade in South cannot be produced. In these cases physical examination Asia is mutual recognition of AEOs among countries, might be preferable as the first option, but the scanning fees allowing deeper data penetration and encouraging greater received by Customs agencies provide a strong incentive to compliance by traders. continue unproductive practices. Finally, effective use of this expensive technology • Leveraging existing information and communication depends on re-engineering of business processes, the technology capacity (ICT) so regulators can access physical movement of vehicles/containers and ensuring that commercial transaction data earlier in the supply chain supporting activities such as image analysis and secondary supports improved profiling and security. inspections are adequately resourced to maximise through- put. When improperly or inappropriately used, scanners can The Role of Technology actually increase the time it takes to clears goods without an The adoption of technology to support information appreciable improvement in security. communication has been part of regional border man- agement activities at a basic level for years. Most, if not Technology in securing Transit all, South Asian nations have now identified a business Controlling and securing transit trade is another area of case for developing a “single window” solution to pro- particular concern for South Asian economies. While there cessing cross-border transactions. However, adoption are a number of transit agreements that seek to provide of more sophisticated technology solutions needs to be solutions to guarantee potential revenue liability, their ability www.worldbank.org/southasia SOU T H A SIA P OLIC Y N OTE S A D VA N C IN G R E GION A L IN TE GRATI O N 3 FIGURE 1: Scanned image of cargo container and efficiency of the technology to produce both improved trade facilitation and security outcomes. • Modern technology can be a useful tool to improve levels of border security when used in the right cir- cumstances and when supported by other operational reforms. However, it should not be a substitute for more fundamental rethinking of strategy and approach. Institutional Reforms: Re-engineering Business Processes and Risk Management Source: Symmetery Magazine, Aug 2010. Essentially, achieving border security is just another element of regulatory compliance. As such, any reforms that improve organizational performance more generally also to guarantee physical security is less certain. To overcome have a positive impact on security outcomes. this, Electronic Tracking and Smart Seals technology (GPS/ By far the most commonly suggested institutional GPRS/RFID, for example) have become common practice in reform for border management agencies is the adoption a number of regions to provide additional layers of security.6 of a risk-based regulatory compliance framework. Figure 2 Electronically monitoring and tracking the movement shows how a strong legislative base is essential when we of, and interference to, transit shipments through the use talk about compliance with the law. Traders with a strong of these technologies can allow customs administrations to compliance record (AEOs for example) are capable of secure many more individual transactions than they could self-assessing their liabilities and need minimal interven- using escorted convoys. Specific routes and time limits can tion by regulators. Where traders want to comply but are also be imposed and monitored, and a physical response is unable to, support and education (Client service) play an only required when a breach is detected. important role in improving their performance, allowing for Practical issues concerning cost of implementation, their compliance to be recognised with improved facilitation. the relocation of tracking devices, capacity of ICT networks For those who deliberately seek to break the law, strong and infrastructure, locating monitoring centres and how to enforcement strategies act as a deterrent and impose deliver a physical response when necessary are all relevant consequences or penalties for non-compliance. In fact, risk considerations. As part of a multi-layered approach to sup- management should be part of a comprehensive change in ply chain-security, cargo tracking technology can, of course, the operational model, consistent with the elements of the prove very effective.7 WCO Revised Kyoto Convention.8 This is what helps bring These examples further highlight the need for invest- all the preceding elements together, allowing risk man- ment in training, human resources, risk analysis and re-en- agement not only to deliver improved levels of facilitation gineering business processes to maximize effectiveness but also to manage all strategic organizational objectives, including an improvement in organizational capacity to achieve border security.9 BOX 1: GPS Tracking in Jordan • Adoption of a contemporary risk-based regulatory In 2008 Jordanian Customs started to replace escorted compliance framework vastly improves an institution’s convoys on most transit movements with GPS tracking and electronic seals. Despite a deteriorating regional overall ability to ensure security while delivering security environment this practice has continued and improved levels of facilitation. grown, with strong support from traders who also appreciate the improved security for their goods, About the Authors seeing it as positive step. This has not only allowed Clay Kerswell is Senior Customs and Border Management significantly reduced transit times for inland transport, Specialist in the World Bank’s Trade and Competitiveness it has reduced costs for traders and allowed customs to re-deploy resources to other critical border security Global Practice, based in Washington, DC. functions. While attempts to interfere with cargo still Charles Kunaka is a Senior Trade Specialist in the World occur, customs’ ability to respond rapidly and prevent Bank’s Trade and Competitiveness Global Practice, based any diversion or theft has also been improved. in Washington, DC. www.worldbank.org/southasia 4 S O UT H A S I A POL IC Y N OT ES A D VAN C IN G R E GION A L IN TE GR ATION FIGURE 2: Risk Based Compliance Management Pyramid Modification of Ayres and Risk based procedures: Braithwaite (1992) • Balance between control control and facilitation enforcement pyramid • Focus on identifying compliance and noncompliance Penalty • Information management focus • Prearrival assessment, clearance, and release • Simplified procedures • Real time intervention in high risk cases Formal warning • Increased self assessment • Posttransaction focus in majority of cases • Intervention by exception • Audits of industry systems and procedures • Reduced regulatory scrutiny • Investigation where noncompliance suspected • Periodic payment arrangements Persuasion • Less onerous reporting requirements Reward compliance Enforce noncompliance • Consultation and cooperation using administrative using administrative • Clear administrative guidelines discretion discretion • Formal rulings Enforcement • Education and awareness and recognition • Technical assistance and advice • Appeal mechanisms Compliance assessment • Recognizes respective responsibilities of government and industry • Provides for electronic communication Client service • Establishes sanctions for noncompliers • Enables flexibility and tailored solutions • Breaks nexus between goods and revenue liability Legislative base Source: Widdowson & Holloway 2011. Acknowledgements 4. OECD (Organization for Economic Co-operation and Devel- opment) (2009). “Security Risk Perception and Cost-Benefit The authors would like to thank, without implicating: Sanjay Analysis.” Discussion Paper 2009–6, Joint Transport Research Kathuria, Sohaib Shahid, Manuel Henriques and Jose Center, International Transport Forum, OECD. Eduardo Gutierrez Ossio. 5. Widdowson, D., & Holloway, S. (2011). “Core border manage- ment disciplines: risk based compliance management”. In G. McLinden, E. Fanta, T. Doyle, & D. Widdowson (Eds.), Border Series Editor Management Modernization. 95–113. World Bank. Sanjay Kathuria, Lead Economist, Regional Integration, 6. See, for example: Alfitiani, A.A. (2010). Jordan’s electronic South Asia, World Bank transit monitoring and facilitation system. World Customs Journal, Vol.4 No.2, (Sept, 2010), 79–88. Endnotes 7. Arvis, J.F. (2011). “Transit Regimes”. In G. McLinden, E. Fanta, T. Doyle, & D. Widdowson (Eds.), Border Management 1. WTO (World Trade Organization) (2013). “Agreement on Trade Modernization, 279–296. World Bank. Facilitation”. Ministerial Decision of 7 December 2013. WTO. 8. See, for example: Widdowson, D. (2005). “Managing Risk 2. Post-transaction audits refers to the process of documentary in the Customs Context.” In L. De Wulf and J. Sokol (Eds.), examination and verification of data after the goods have been Customs Modernization Handbook, 91–99. World Bank. cleared. 9. WCO (2008). “Customs in the 21st Century: Enhancing Growth 3. Aberdeen Group (2006). “Industry Priorities for Visibility, B2B and Development through Trade Facilitation and Border Collaboration, Trade Compliance and Risk Management.” Security”. WCO. Global Supply Chain Benchmark Report. Boston. 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