Compliance Economics: 80/20 or 100%?

          Most business people today know about the Pareto principle, commonly referred to as the 80/20 Rule. It was named after the Italian economist Vilfredo Pareto. Pareto discovered that 80% of the land was owned by 20% of the population. He also observed that 20% of the pea pods in his garden contained 80% of the peas.

          The principle is relevant to many aspects of our modern business world today. For example: 80% of sales come from 20% of the customers; 80% of the customer complaints come from 20% of the customers; and so forth.

          The principle also applies to risk management. For example: 80% of the crime comes from 20% of the criminals; and 80% of Customs non-compliance comes from 20% of the Customs client base.

          Most Customs compliance efforts by the authorities today are geared toward the 80/20 Rule. The concept, also spurred on by WCO (World Customs Organisation) is geared ‘in part’ toward trade facilitation.

          In the Customs environment, identifying risk requires pre-and post-audit data, knowledge of one’s client base, a study of market trends combined with current legislative mechanisms and, of-course, a bit of sixth sense. Once validated, place the information into a database containing a series of formulae. What do you have? A Customs risk engine. The objective is to comply with the 80/20 Rule and to facilitate trade. It also allows Customs authorities to utilise resources more efficiently.

          One industry expert explains this with an example. If a hundred fish swam toward a shark, the shark could not possibly eat all the fish at once. The shark will need a system to help it decide which ‘non-compliant’ fish to bite. The balance of the ‘compliant’ fish are allowed to swim past, un-affected.

          Also applicable to this discussion is the concept of non-intrusive interventions. The UNECE (United Nations Economic Commission for Europe) goes into more detail about this. The document can be found at the following link: http://tfig.unece.org/ .

            So, what does this mean for the average trader, importer and exporter? Do you apply the 80/20 Rule when conducting annual self-compliance audits, or do you aim for a 100% coverage? Do you audit every single document passed throughout the year?

          Well firstly, understand that any contravention found by the authorities immediately becomes part of the assessment criteria which gets built into the Customs risk engine. Once you are on the Customs radar it is difficult to escape it. Secondly, understand the industry that you are in. If you are in the clothing and textile industry you should know by now that Customs interventions (at present) are at an all-time high. Expect to be targeted for possible undervalued foreign purchases. Thirdly understand the relative size of your company and the volume of trade you are involved in, in relation to the market. If you are a smaller operator, then expect to attract more attention relative to the size of your operation. If for example you trade in 10 x shipments per annum and 1 x shipment gets stopped by Customs, it will equate to 10% of your trade. You are generally advised to conduct 100% compliance audits. Larger operators who for example trade in several thousand shipments annually may, relative to their size and particular industry be less severely affected.

          With the new Customs legislation it is becoming more apparent that an approach by the authorities toward zero defects is the desired outcome.

          While there is no one size that fits all to the 80/20 question, the answer may depend on how smartly you conduct your compliance approach.

Who’s Responsibility Is Self-Compliance?

          Well, it may depend on who you ask. As an importer or exporter the concept of Customs self-compliance is implied to be ‘you’ off-course. But is this really the case? Are you the only role-player affecting your compliance levels? What about the concept of accountability, and who is held financially liable when things go wrong?

          The answer to these questions will once again depend on who you ask. It will also depend on the specific circumstances in each particular situation. But, what I am referring to is how your company views compliance at large. What is the corporate culture of your organisation toward compliance, and what is the culture of your industry?

            From a SARS perspective, the first basic assumption is that people and companies want to be compliant. They want to do the right thing and are seeing to practice compliance at their own free will.

          People are hence given the benefit of the doubt by an organisation (SARS) who would otherwise be seen as draconian in nature. This aspect forms one of their first considerations when talking about risk.

          So, allow me to answer the big question by saying that… compliance is everyone’s responsibility. Compliance is something that must be practiced on every level of the organisation all the time. You may from time to time for example ask how your boss sees compliance, and your boss’s boss, and so on.

          You will also need to start looking around you, at your suppliers, and your supplier’s suppliers. Question how they see compliance.

          Also ask yourself how their compliance levels affect your own. Are you or any of your suppliers participating in the SARS PT (Preferred Trader) accreditation program?

          Who is supporting you and your organisation if you are involved in such a program?

          Are your overseas suppliers or buyers participating in a foreign Customs accreditation program and how do your own compliance levels affect theirs in turn?

          Will you at some point fall out of favour by a foreign buyer if you are not participating in the local Customs accreditation scheme?

          If you do not participate in the PT scheme, do you or your company conduct periodic audits and reviews of your Customs documents?

          Do you make use of independent third party auditors for your Customs work?

          Finally, how is legal liability treated versus commercial liability? And, if there is a difference, what does the Customs legislation say?

          While the answers to these questions will depend on your particular circumstances, this blog will explore the matter in some depth, while at the same time not being too technical.