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Customs risk management: towards a new paradigm in Brazil

Conference Paper · September 2012

DOI: 10.13140/2.1.4260.9600

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Customs risk management: towards a new paradigm of management in Brazil

Cristiano Morini, professor and researcher, State University of Campinas (Unicamp,

Brazil), FAPESP research project, Head of Customs Study Group,
cristiano.morini@fca.unicamp.br

Paulo Hayashi, professor and researcher, State University of Campinas (Unicamp,

Brazil), paulo.hayashi@hotmail.com

Luis Antonio Santa-Eulalia, professor and researcher, State University of Campinas

(Unicamp, Brazil), FAPESP research project, luis.eulalia@fca.unicamp.br

Abstract

The traditional Customs risk management applied to usual practices of target selection can
be misunderstood as a type of technical barrier, adding non-value time and costs. Because
of the increasing number of regular and not regular imports in 2012, Brazilian Customs
administration has intensified the physical and intrusive controls over boundaries, causing a
damming effect of cargo at Customs, also with repercussions to the compliant operators.
This situation brings the need for the new National Centre of Customs Risk Management to
be operational, as well as other organizational changes. This study emphasizes the need for
a leap in quality and intelligence for Customs controls. Considering the deterioration of
international economics, and the analysis of the first quarter of 2012 in terms of trade
balance in Brazil, a conclusion emerged: the Brazilian Customs administration must be more
effective to face the international flow of merchandises. Customs practices and risk
management must be unattached to trade policy. This paper raises hypothesis that the
National Centre of Customs Risk Management may initiate the change in Customs
administration in Brazil, towards a new paradigm. Exploratory research is used as
methodology, considering an array of macroeconomic data and governmental measures
taken in 2011 and 2012.

1. Introduction

This paper develops the thesis that the increase in physical inspections for the
control of imports in Brazil, during 2012, can be confused with technical barriers. To
prevent this type of comparison, as recommended by the WCO (World Customs
Organization), the National Centre for Customs Risk Management (CERAD)
established in March 2012; in order to modernize the treatment and the risk analysis,
using intelligence attributes.
The increase in clearance time by the Customs authority in Brazil, relates to the
traditional analysis of targets, with increased physical inspections, owing to the
1
current human resources available. If, in times of international economic downturn,
the trend of increased physical controls becomes a practice, there will be a return in
the detection and the risk treatment, in the control methods and in the fraud detection
techniques.
The study proposes a reform of the Customs organizational architecture in Brazil,
which can be initiated with emphasis on the Centre for Risk Management creation.
The period of data and context analysis encompasses 2011 and first quarter of 2012.

Besides, this paper aims to identify and analyze the international economic
environment and it correlation to Brazilian foreign trade, focusing on risk
management (and the creation of National Centre of Risk Management), moreover
the need of strengthen the WCO capacity building.
This paper is divided into some sections: brief introduction; methodology (section 2);
literature review related to Customs risk and technical barriers in sections 3 and 4;
macroeconomic context between mid 2011 and mid 2012, in section 5; section 6 is
related to measures taken by the Brazilian Customs administration in the context of
risk management; and mainly, section 7, and 8 analyzes the need of improvement in
the Brazilian Customs architecture and capacity building.

2. Methodology
This paper focuses on the macroeconomic data analysis for the first quarter of 2012.
The Brazilian Institute of Geography and Statistics (IBGE) provided the data. The
Federal Revenue of Brazil provided data regarding Customs revenues. The export
and import statistics are from the Department of Statistics (DEPLA), the Department
of Foreign Trade (SECEX), the Ministry of Development, Industry and Foreign Trade
(MDIC), and Studies Center Foundation for Brazil Foreign Trade (FUNCEX).
The research is classified as exploratory, with data from the Brazilian government
official sources. The literature review encompassed the international literature on risk
management, and both the national and the international literature on trade barriers
and international economy.

3. Risk management in the supply chain: initial considerations

2
According to Autry and Bobbitt (2008, p. 46), the concept of the supply chain security
orientation can be defined as:
the propensity of a company to cooperate, plan, adapt, collaborate and
communicate, both internally and with trading partners and governmental
entities, toward the dual purpose of strategic prevention and the response to
potential risks threatening the supply chain assets, and of minimizing risks
threatening the performance and/or the continuity of the supply chain
operations.

Risk is dynamic, requiring constant monitoring, review of processes, communication

and consultation with specific skills on how to avoid and to treat it. Risk management
allows for better allocation of resources to combat it effectively and efficiently; thus,
facilitating the appropriate selection of high-risk cargo. The selection criteria should
be developed in partnership with the private sector and other Customs
administrations. In addition, risk management is a methodology that should help
managers makes the best use of available resources (ASYCUDA 2000).
Among the advantages of reducing risks, the following stand out (Autry, Bobbitt,
2008):
- High performance of the supply and value chains;
- Customer satisfaction;
- Cost reduction, because of the supply chain reliability;
- Lower lead times for the costumers;
- Waste reduction;
- Increasing in delivery reliability;
- Fewer controls on a country's input and output (when going through
Customs); whereas there is no need for controls already performed by a reliable
chain partner;
- Investment protection and increased competitiveness;
- Continuous supply chain.
In the supply chain, "risk" means the probability of an event occurring at the entrance,
exit, and transit and in the end-use of goods moved between territories (CCIP 2011).
The study of security in the supply chain also needs to take an inventory of potential
risks.
Customs risks, the logistics and operators' accounting systems, the flow of goods, of
documentation, of facilities, of transport units, of the economic operator itself, are

3
among the World Customs Organization (WCO) requirements for the establishment
of a secure supply chain.
The following were specifically identified as Customs risks: incorrect classification in
harmonized system, with the consequent misapplication of import and other taxes;
tax exemption when not applicable; incorrect country or provider origin; preferential
rates abuse; incorrect valuation; untrustworthy behavior of traders; counterfeiting
(piracy), among others.
According to Hintsa et al. (2011), the research on Customs risk management noted
that the main risks related to export and import are content (narcotic substances,
dual use substances and wildlife); tax evasion in terms of value and volume; tax code
and country of origin; violations of intellectual property (piracy and counterfeiting).
Customs has an important role in controlling risks in the international supply chain.
However, Customs cannot be seen as a bottleneck that will directly influence the
increase in the total time for the international operations.
According to Goldratt (1982), with the constraints theory, bottleneck is a slower
activity, which will guide the speed of the entire operation in the chain. It is useless to
produce competitive effects in the other links, if this link is neglected. Customs
cannot be a bottleneck in the management of the global supply chain.
Customs is increasingly seen as a key link in the management of the international
supply chain. The paradigm of the 21st century Customs presents the following
challenges: to promote a country's socioeconomic development; to create the
conditions for economic growth; borders control; to provide security and protection for
the citizens (Stein 2008).
Besides, Customs administration should accomplish four missions: fiscal (tax
revenue); economic (deals with the exemptions derived from international
agreements); protection of the citizen/consumer (restriction of controlled substances,
counterfeit goods, etc.); safety of goods at Customs facilities and issuance of
reliability certificates (Lionel 2010).
Holloway (2010) points out that there is no global formula for measuring the
effectiveness of border initiatives, only initiatives such as the ones by the World Bank
(Doing Business) and the WCO. Holloway (2010) points out that the measurements
should not be concentrated in the Customs clearance time, but in something broader,
effectively related to partnerships with the public and private sectors; thus ensuring

4
the reliability and predictability of the Customs procedures, focusing on time, cost,
simplification and risk.
For this to occur, the WCO has encouraged capacity building, involving the following
key elements (Barczyk 2010):

a) Political will;
b) Accountability;
c) Integral vision;
d) Structured approach to the priorities;
e) Own sustainable capacity building (such as instructors training);
f) Creation of models (such as best practices);
g) In tandem working at the regional and national levels;
h) Knowledge from third parties (accredited experts);
i) Monitoring and evaluation.

The capacity building also considers the need for effective techniques in the Customs
and Risk Management, CRiM, which consists of a balanced mix of policies and
strategies, processes and procedures, human resources, tools and techniques; and
information and intelligence (Hintsa et al. 2011). Risk management has become an
essential asset due to the increased number of participants in international trade,
providing the most appropriate methods to manage, mitigate and avoid uncertainty in
the international logistics operations (Childerhouse & Towill 2003 apud Hintsa et al.
2011).
The removal of the risk factor will never be 100% effective; hence, the importance of
its proper management (Brown 2010). A threat identification determined by
intelligence, which is not a single product, but an ongoing process. The vision in
process allows to work in a continuous way, considering an array of dimensions. The
intelligence work in risk management allows for the reasonable anticipation or
prediction of future adverse situations. The "intelligence" should be based on
partnerships, collaboration among neighbors and economic operators (Reeder 2010;
Truel 2010).
The risk management improves overall performance, increases the
transparency through widening the range of available information, as well as
raises Customs administrations´ social responsibility and accountability. The
risk management process helps Customs administrations to focus on priorities

5
 and decisions on deploying limited resources to deal with the areas of highest
risk (Biljan, Trajkov 2012, p. 302).

Besides, intelligence can be build from academic contributions, which is able to act in
a positive way, considering international network and some data mining from
theoretical and practical experiences which contribute to decision making.

4. Technical barriers to the international trade

Protectionism is the governmental intervention in the trade between a particular

country and the outside world through strategic trade policies aiming to correct any
flaws generated by free trade, especially in developing countries, whose economies
are more vulnerable to global instabilities.
According to Barral (2011, p 14.) protectionism is "the use of measures aimed at
modifying a commercial flow, often seeking to favor local producers."
Protectionism has been advocated as an alternative for countries in the industrial
development phase; since it was believed that free trade is only beneficial to the
already industrialized countries, a concept that, in certain cases, still prevails today.
Carbaugh (2011) explains that a protectionist policy can present advantages or
disadvantages to the various economic agents in the same country. A country's
participation in the international trade has different impacts on its domestic sectors.
High cost older sectors, which compete with the imports and have lost their
competitive edge, benefit from the protectionism, while free trade is advantageous for
exporters and domestic consumers because of the increased productivity and lower
prices.
Companies prone to protectionism, along with their suppliers and labor unions, exert
political pressure on the government to maintain high tariffs on imports; thus, hurting
the consumers, who are oblivious to the fact that the high commodity prices may be
due to their country's protective trade policies. Now, consumers are dispersed and do
not participate in their country's business decisions, absorbing a small cost whose
origins are unknown to them, at the expense of higher gains from such organized
interest groups (Carbaugh 2011).
Carbaugh (2011) argue that the government offers of protection depend on several
factors, mainly the cost generated to society, which involves the loss of
competitiveness and the decreased quality of life.
6
According to Morini (2011), protectionist practices are used by countries in order to
reduce its imports, and can be accomplished through tariff and non-tariff barriers.
With tariff reduction policies advocated by the GATT and the WTO, member
countries began to seek alternatives to protect their industries; thus acting against
the trade liberalization. Hence, the use of non-tariff barriers increased considerably,
causing its inclusion on the GATT agenda, since the 1960s (Morini 2011).
According to Krugman and Obstfeld (2003), the non-tariff barriers are bureaucratic
restrictions on imports, i.e., they occur through the establishment of requirements for
documentation, for technical standards, for safety, for health and sanitation, in order
to hinder trade. The WTO National Treatment clause prohibits levy of more restrictive
technical regulations on imports, than what are applied to domestic products.
The use of practices that harm competition among countries, and cause damage to
the domestic industry, or protectionism for no apparent reason, are violations to
international trade. In the event of such violations, the state can use instruments to
protect the domestic market against the unfair practices of a particular exporter, if
they are in agreement with the WTO rules. These instruments are countervailing,
safeguards and anti-dumping measures.

5. Understanding the macroeconomic context and the Brazilian foreign trade

(April 2011 to April 2012)

Since the international crisis of 2008-2009, the global economy has experienced
moments of international trade recrudescence, where most countries began to adopt
more protectionist policies, in order to protect the domestic industries and jobs.
These policies, adopted by various countries to a greater or lesser degree, aimed to
stem the flow of imports, which caused a general decline in exports, and a lower
propensity to spend. Figure 1 shows the trend of the global trade with a clipping from
2011.

Figure 1: Performance of exports by selected countries

7
 Trend

Source: DEPLA/SECEX/MDIC/Brazil, 2012

Since the international trade is a two-way street, if protectionist practices tend to

increase in imports, exports tend to decrease. Moreover, in time of crisis, there is a
propensity for less spending, either on domestic or imported products.
In selected countries, the increase in imports is possible during times of domestic
economic crisis, in the sense that the consumer sensitive to pricing, searches for the
best competitive conditions. That is when the more protectionist policies are created,
in order to prevent the increase in imports to the domestic products detriment.
Associated with these characteristics, the contraband and other irregularities have
sought alternative routes of entry, in order to feed the appetite for lower priced
products. In this sense, the increased illegal trade causes the improvement of the
Customs risk management, which in some instances may be confused with
protectionism, against the backdrop of a sluggish international economy.
This phenomenon has been occurring in Brazil, especially in the first quarter of 2012
(January to April). A package of measures intended to stimulate national
competitiveness have been launched with the Bigger Brazil Plan (Plano Brasil Maior),
in August 02, 2011, with the motto "innovate to compete, compete to grow" and
8
working in conjunction with the idea that a "developed country is a country with
industry." In April 03, 2012, new measures taken into account in so called Bigger
Brazil Plan II; among them, intensification of trade defense measures.
The Plan was prepared against a background of valorization for the national
currency, the real, considering the increase in imports and the need for domestic
industry and economy to become more competitive. The Bigger Brazil Plan took
under consideration that the Brazilian industry needs better conditions to be able to
compete, and the existence of predatory competition for the manufacturing sector.
Furthermore, there is a need to improve the industrial productivity.
From 2011 to April 2012, the exchange rate contributed to the increase in imports.
The combination of a high valued real and the small growth of the developed
economies, led to a redirection of the exportable product stocks toward Brazil and
other emerging economies.
According to the IBGE data, from January to March 2012, the Brazilian industrial
sectors with the worst performance (over the same period in 2011) were motor
vehicles (- 20.4%), clothing and accessories (- 14.1%); communications equipment (-
13.1%), computers (- 12.7%) and electric motors (- 12.1%).
The Bigger Brazil Plan considers that imported products are in part appropriating the
market. The Ministry of Finance, with measures to encourage the domestic industry,
while considering the World Trade Organization (WTO) rules, spearheaded the plan.
The plan considered three axes of measures:
a) Stimulus to production, investment and innovation;
b) Defense of the industry and the internal market;
c) Incentives to export and trade defense.
In Brazil, the Customs administration, along with the revenue collection and the
social welfare, fall under the Ministry of Finance jurisdiction.
The federal government took a number of measures favorable to the Brazilian's
industry dominance in the domestic market. They are as follows: tax reduction and
other tax relief (such as payroll); cost reduction (named "Brazil cost"); incentives for
investments with higher content of local aggregation (starting with the automotive
industry and the new automotive regime for 2013-2017). Import tax increase within
the WTO agreement, manufacturing exports credit, accelerated return of
accumulated tax credits, creation of 120 jobs for foreign trade analyst (aiming to

9
strengthen the trade defense), scholarships for training abroad, and simplified credit
acquisition, among others.
Seven months after the announcement of the above measures, the Federal Revenue
Office announced the need for greater control on imports, considering the increase in
imports in general, and especially, the unjustified increase in imports from certain
unusual origins.
In 2003, the share of imported industrial goods accounted for approximately 11
percent of the domestic consumption. In 2011, this share has increased to almost 23
percent. In addition, in the 2012 forecast, for the first time in eleven years, the influx
of Foreign Direct Investment (FDI) shall not cover current account deficit.
From January to April 2012, imports increased in the majority of the categories,
compared to the same period in 2011: fuels and lubricants (+15.1%), capital goods
(+4.2%), raw materials and intermediate goods (+1.4%). Consumer goods fell by
11.1 percent, especially the durable goods such as cars (-22.6%), household
appliances (-14.2%) and furniture (-8.5%).
The different behavior between the imports cumulative total and the consumer goods
categories is explained by three factors:
1) The siege held by Customs during the so called "red tide" operation (and
other similar operations. About red tide, it is commented ahead);
2) The new trade policy for cars import, with significant increase in the tax
rate for industrialized products (IPI); for vehicles imported from
manufacturers without local subsidiaries, and within a determined limited of
local content aggregation (IPI resembles the Aggregated Value Tax in
several countries).
3) The weak recovery of the Brazilian economy, specifically in April 2012.
This paper focuses on the workings of the Brazilian Customs, in terms of risk
management, in a scenario of a 34 percent drop in YTD trade surplus; compared to
the same period of 2011 (first quarter), as shown in Figure 2. The allusion to the term
"red" refers to the red channel in the inspection of goods, a filter for tighter control, in
which the inspection is done manually. This type of inspection is traditionally slower
than other modes of control, triggering an artificial restriction on the entry of goods.

Figure 2: Brazilian trade balance in 2012

10
 Source: DEPLA/SECEX/MDIC/Brazil, 2012

The stricter search by the Customs, to contend against illegal acts and fraudulent
operations (such as irregular triangulation), does not necessitate to add more time to
the controls. However, in terms of the human and materials resources currently
available to the Brazilian Customs administration body, the time increase is
inevitable, which causes a backlog of goods at the Customs.
Widdowson (2010) points out physical controls, as interventions, should be
exception, “intervention as exception”. In addition, The Facilitation-Control Matrix
shown in Figure 3 provides a snapshot of the various ways in which border agencies
and Customs administrations manage their roles and responsibilities.

Figure 3: Facilitation-Control Matrix

Source: Widdowson (2003).

11
The Brazilian Customs is at the “red tape approach” and need to move to “balanced
approach” as a target.
Balanced approach is a term used to describe a regulatory compliance strategy that
is based on the principles of risk management. It implies regulatory intervention when
there is a legitimate need for it, that is, intervention based on identified risk
(Widdowson 2003; Widdowson 2010)
The rise of the national currency (the real) is another variable that explains the
increase in imports. In 2012 (first quarter), the real had one of the highest gains
against the dollar, in the order of 4.43 percent. Brazil's attraction to the foreign
exchange value was motivated by a domestic economy on the rising curve, by the
interest rates charged by country and by the commodity prices, by the products of
which Brazil is a global reference.
The valorization of the real was responsible for the domestic industry losses in the
local market, with a decline in industrial production of approximately 3 percent
(January-April 2012), and the resulting stimulus to the imports, a phenomenon
observed in the first quarter of 2012 (see Figure 4). From May 2012, measures to
reduce interest rates promoted by the Brazilian government, falling commodity prices
(mainly provided by the slowing of the Chinese economy), and better control
measures of imports, contributed to the signs of better macroeconomic outcomes for
Brazil.

Figure 4: monthly imports, daily average (US$ millions in FOB)

12
 Source: DEPLA/SECEX/MDIC/Brazil, 2012

Sometime between March and April, the operation red tide begins. The preservation
of national security and the responses to unfair trade, demonstrated the Brazilian
government’s political willingness to protect the domestic industry. Brazil does not
wish to be a service economy. With this goal, and a system of Customs with the
same structure of supervision, it was inevitable the increase in the Customs controls
time.
The national officer´s union (Sindifisco) has initiated in 2012 a campaign of
valorization of public servant and a strike has being announced, on the one hand. On
the other, the Brazilian government has announced in 2012 the process of hiring 200
more officers and 750 more tax analysts.

6.Actions of the Customs administration against the backdrop of the Brazilian

foreign trade: identification, analysis, evaluation and risks treatment

The increased time in border controls is difficult to challenge both in the local justice
and in the international forums of governance, because it is not overtly protectionist
and there is statistical evidence (in the analyzed period) of the increase in fraudulent
trade on the international level, which is not a unique problem of the Brazilian
Customs administration.
Research by the Cross-border Research Association, in Lausanne, Switzerland, with
24 Customs administrations of all continents (excluding Brazil), held in 2011,
identified the following three main threats: false declaration of value, narcotics
smuggling, and false declaration of content.
Especially in 2012 in Brazil, people who intentionally fraud have used, among other
measures, the incorrect tax classification and fraudulent declaration of origin.
In fact, Brazilian imports from certain sources increased for no good reason (in the
first quarter of 2012). As is the case of imports from Antigua and Barbados
(+1,841%), Bahrain (+1,548%), Cayman Islands (+7,506% ) Keeling Islands
(+1,360%), Ivory Coast (+1,313%), Fiji (+1,367%), Gabon (+2,074%), Gibraltar
(+36,205 %), Malawi (+119,915%), Maldives (+10,112%), Mozambique (+22,895 %),

13
Senegal (+10,635%) and Tonga (+2,427%), these are facts that justify a more
accurate risk analysis.
There are indications of Chinese goods being shipped to these countries, in order to
circumvent anti-dumping barriers. This practice is called triangulation or fraudulent
circumvention.
In a scenario of international governance, in which international organizations such
as the WTO and the WCO constrain the states' strategies, trade restraint methods
such as high tariffs, levy quota, exchange controls and embargoes are more blatant.
Less egregious, are methods of local content such as requirements and
administrative delays. Moreover, less usual methods can be viewed with the
voluntary export restraint (VER).
Typical examples of administrative delays:
- Inconvenient ports for imports;
- Product-damaging inspections;
- Understaffed Customs officers;
- Lengthy licensing procedures;
- Slow Customs inspection;
- Reduced levels of transparency in the processes.
Brazil has accumulated constant trade surpluses since 2000. Figure 5 shows the
trade surpluses from 2003 to 2012, during the analysis period (January-April).
However, in January 2009, 2010 and 2012, there were trade deficits, which led the
country to take greater administrative control measures in the Customs (see Table 1),
with the need to modernize the mechanisms of intelligence and investigation of
Customs risk.

Figure 5: Brazil's trade balance

Source: DEPLA/SECEX/MDIC/Brazil, 2012

14
Since the means of protection are constrained by the mechanisms of global
governance (WTO and WCO), the choices have been made for management
practices, which slow down the entry processes of incoming goods. These practices
may be confused with protectionist measures, although difficult to challenge, and at
the same time, they hamper the innovations in terms of Customs risk management.
The management modernization of the Brazilian Customs authorities requires the
implementation of single window environment, and the search for mutual recognition,
i.e, beyond the new centre for risk management jurisdiction.

Table 1: Period, the trade deficit (in US$ millions), and treatment of risks through
timely actions by the Brazilian government.

January, 2009 - 530 January: requirement for non-automatic import licenses for
hundreds of new tax classifications, which was reversed in
less than a week after domestic and international
pressure.
January, 2010 - 181 Non-automatic licenses for cars import from Argentina.
2011 Introduction of technical barriers for products with
questionable quality. Partnership between the Brazilian
Customs and the Metrology Institute, Inmetro (National
Institute of Metrology, Quality and Technology). Inmetro
acts on the supervision, and the requirement for technical
specifications for products imported even before entering
the country.
December: introduction of the red channel (physical
verification) for all products and supplies related to the
footwear production chain, to identify and fight fraudulent
practices related to triangulation.
January, 2012 - 1,296 March: Operation Red Tide was triggered by fraud
allegations (underpricing, triangulation, and misuse of tax
classification). Operation reached all imports made by
companies or individuals (these mainly by international
parcel post).
The ex-tariff benefit suffered a reduction of 70 percent,
(January-April 2012).
Creation of the National Centre for Risk Management
(CERAD) and the Technical Group for Strategic Studies of
Foreign Trade (GTEX).

To avoid confusion between Customs risk management and protectionist measures,

in a turbulent economic environment internationally, it is necessary to create a new
model of risk management, in any case is a slow process. It is true that individual
behaviors and attitudes influence and are influenced by the organizational system. It
is unnatural to presume a less bureaucratic Customs in a system of institutions, and
15
cultures with deep-rooted bureaucratic procedures. Innovation is a challenge and the
obstacles are much greater than the tools available to make it happen.
As Scott (1995) has pointed out, “institutions consist of cognitive, normative, and
regulative structures and activities that provide stability and meaning to social
behavior. Institutions are transported by various carriers – cultures, structures, and
routines – and they operate at multiple levels of jurisdiction”.
The focus of the Customs administration should not be on the problems caused by
unreliable operators, but on the benefits provided by the reliable ones instead. In
both views, the goal is the same: the Customs control. The reality is the same, what
changes is the approach to it. Historically, the Brazilian Customs conduct is to avoid
damage to the economy. The change in conduct, aimed at benefiting the economy,
should lead to changes; neither an easy nor a speedy process, but that will serve as
guide to the choices and the decision making processes.
Among the risks associated with Brazilian Customs administration, the main one
relates to the negative impacts to the domestic industry and to the national
employment. While the shadow of this damage outweighs the benefits generated by
the global value chains, the choices tend to be targeted toward more protection.
Hence, the need for action from the new National Centre for Customs Risk
Management (CERAD).
First, the solution passes through the acceptance of the benefits from the trade
facilitation related to global value chain (there must be noted, the creation in 2008 of
the Technical Group on Trade Facilitation, GTFAC). Second, need for resources
allocation and partnerships to initiate changes. Third, the creation of multidisciplinary
teams able to spearhead the change and the innovations. Fourth, the monitoring and
the results assessment, with the needed adjustments along the way.

7.The capacity building improvement needs in the organizational architecture

of the Brazilian Customs administration
In April 2010, opened in Brasilia, the WCO's Customs Habilitation Center. At the
time, it was emphasized the need for the partnership between Customs and
businesses.
In addition to the actions identified in Table 1, the red tide operation stands out, the
largest combat operation against Customs fraud in Brazilian history, which began on

16
March 19, 2012 and it is ongoing with no set date to end. On the same day, the
National Centre for Risk Management (CERAD) was announced in Rio de Janeiro.
There is an urgent need for quick and precise actions from the CERAD toward the
modernization of the Customs administration, since the red tide operation has added
time, and expenses to the flow of goods across the borders. Effective management
of Customs risk should not add time to the controls, but intelligence.
Risk management should be prepared for all sorts of eventualities; thus ensuring the
uninterrupted flow of trade (trade facilitation) with the appropriate controls. This
implies maintaining a number of interventions to the lowest level required, at the
same time ensuring the safety of the regulatory procedures (Widdowson & Holloway
2010).
Traditionally, Customs risk management has been accomplished by the targeting
practices. However, a more organic approach to the regularity management should
be pursued; by analyzing customer behavior, using different strategies and
increasing intelligence sharing (beyond information) among the Customs
administrations. Effective risk management practices will not be devised overnight,
instead, they require years of commitment from the managers and employees at all
levels of the Customs authorities (WCO 2011).
The red tide operation focused, specially, in non-durable consumer goods, such as
clothing, footwear, toys, electronics, handbags, toiletries and others. Nevertheless,
the upset at the Customs even created import barriers for the compliant importers.
The overload at warehouses in port areas and airports caused a damming of cargo,
that in turn increased the clearance time for all orders, regardless of the specific
Customs risk analysis of each shipment.
However, with the human and material resources that the Brazilian Customs
administration have available nowadays, the choice was made to value the need for
protection, inevitably causing delays during the inspection (by the sheer number of
physical verification in the primary zone), since the amount of oversight and the
bureaucratic procedures are not proportional to the number of officers available for
the release of the goods.
Thus, the reached conclusion is that the Brazilian Customs organizational
architecture should be re-engineered, starting with larger investments. The income

17
for the investments could come from the increase in revenue collection, due to the
growth in imports.
With the revenues increase of 15.2 percent (January to March, compared to the
same period in 2011), resulting from import tax and excise tax on manufactured
products linked to imports, the Customs revenue was of US$ 6 billion from January to
March 2012, an increase of US$ 780 million over the same period in 2011.
The realization and acknowledgment that business as usual is no longer
sustainable generally means the administration will need to make a
fundamental reassessment of its mission, roles and methods of operation.
This often leads administrations to recognize that they can no longer interact
in a physical manner with 100% of cross-border flows and need to move from
traditional gatekeeper style controls toward a riskbased operating model. (...)
To address this challenge most administrations have implemented risk
selectivity and targeting. However, it is well recognized that a modern risk
management strategy, while continuing to embrace these techniques, must go
beyond selection and targeting and introduce new ways of functioning (WCO
2012).

Figure 6 shows the outline of a typical organizational architecture, which can be used
in the re-engineering of the Customs administration in Brazil.

Figure 6: Outline of a typical organizational architecture

Source: Wild, Wild & Han 2008.

As shown in Figure 6, applying the Brazilian Customs context:

18
- Processes are the manner in which decisions are made, and work is
performed within the organization. In most cases of Customs procedures,
there is a prevailing need for large amounts of paper. It is important to
remember that Brazil does not have the single window environment;
although the Integrated Foreign Trade System (Siscomex) exists, various
federal and state agencies are not connected to the system. Although, the
information is recorded electronically in the Siscomex, there is a need for
refer of all documentation in print;
- Organizational culture refers to the norms and value systems that are
shared among the employees of an organization. In the Brazilian Customs
organizational culture, there is a prevalence of a bureaucracy environment
and high number of controls. The Customs compliance program called
Blue Line, introduced in late 1990, has poor adherence by the companies.
There is no sense of conviction that membership brings more benefits than
the current situation. Furthermore, the red tide operation has been an
aggravation for the Blue Line companies, since the cargo damming at the
Customs is not conducing to the speedy cargo output;
- People are not just the employees of the organization; the term refers also
to the strategy used to recruit, compensate, and retain those individuals
and the type of people they are in terms of their skills, values, and
orientation. The number of Customs officers has hardly changed since the
start of the Brazilian trade liberalization, in 1990, an issue constantly raised
by the officers' unions, as Sindifisco;
- Incentives and controls should be related to performance rewards and to
the use of intelligence in technical procedures, using both the technology
and the sharing of information. In Brazil, there are no reward policies at the
federal level, only in some of the states;
- Structure must provide the resources and tools needed to develop the
efficiency and effectiveness of the tasks, as well as a robust and simple
legislation. There are 34 working bodies and governmental agencies linked
to the foreign trade, whose coordination should be mandatory.

19
Risk management cannot be used as an instrument of trade policy, against a
backdrop of a sluggish international economy. Risk management must be uncoupled
from the elasticity of the demand for imported products.
The WCO offers incentives to the risk assessment centers. According to Aniszewski
(2011), the trend toward advanced electronic information, the need to manage this
information, the development of IT capabilities, and the increasing need to address
borders risks from a full-scale government perspective, will most probably be some of
the drivers, which will intensify the establishment of these centers in the future.
Moreover, Aniszewski (2011, p. 18) adds: “the mere establishment of the facility will
rarely be a silver bullet, and needs to be a part of a wider organizational risk
management framework”.

8. Conclusions
Trade facilitation should not be perceived as an issue of the developed countries
interest, considering the global competitiveness associated to global supply and
value chains. Trade policy can be defined by the relative liberalization within the
international trade rule, in a setting ruled by global governance.
Customs effectiveness should not be confused with trade policy. Simplification of
Customs procedures and trade facilitation are unrelated to trade policy liberalization.
Trade facilitation is not an incentive to unrestricted importation. The trade facilitation
is related to the modernization of the controls, and the reduction of the bureaucratic
processes.
A country can make use of trade defense mechanisms for practices it understands as
unfair, or not in accordance with international standards. The government
effectiveness should be an example to the economic operator. A protectionist trade
policy can be adopted with efficiency, effectiveness and appropriate risk control at
Customs, without becoming an obstacle.
The valued real caused the need for specific measures by the Brazilian government
in order to avoid the deterioration of exchange terms. While Brazil can take
advantage of the international economy expansion, from 2001 to 2008, there was a
weakening in the arguments for the Brazilian organizational architecture reform.
Internal weaknesses were masked by the economy's expansion. In an adverse
scenario, retraction of the international economy and appreciation of the real

20
substantially changed the context, leading the Customs administration to implement
control measures for the imports.
The deepening of the European crisis and the international economic downturn, in
May 2012, forced the real to devalue again, which helped to mask the effects of the
red tide operation, for the difficulty of measuring whether imports decreased because
of the Customs actions or the rising price of imported goods. (With the devalued real,
came the Brazilians' loss of purchasing power).
The Brazilian industry is diverse and in many of the most competitive sectors, part of
the global supply chains. Excessive number of Customs controls initiatives, with the
increase in time and logistics costs (increased cost of inventory, storage fees and
others), undermine the national competitiveness and do not conform to the best
practices of Customs risk control.
Globally, the most competitive industries are not specific to any country in particular.
Instead, they are part of the global value chain (products are “made in the world”),
collaborating among them and constantly investing in technical and management
innovation. In this sense, the creation of the National Centre for Customs Risk
Management could be the beginning of the re-engineering required for
modernization, as well as the signing of cooperation agreements between consenting
agencies and the introduction of paperless controls, among others.
From the perspective of the Brazilian government policy analysis, from August 2011
to April 2012, with emphasis on the first quarter of 2012, there are noticeable actions
that seek to stimulate the domestic industry, with respect to global governance of
international institutions such as WTO and WCO, but lacking the necessary
investments. Risks management should improve performance in a noticeable and
measurable way (WCO 2012).
This study recommends a reform of the organizational architecture at Customs in the
broadest sense, not only with the greatest allocation of budgetary resources in terms
of managing people and equipment (as non-intrusive technologies), but also a reform
in the structure, and in the processes. Moreover, in the local culture in terms of
Customs control, providing more emphasis to the positive aspects of a proper
customs risk management, as the benefits generated by global value chains,
according to the “Customs in the 21st Century strategy”.

21
In addition to the National Centre for Risk Management (CERAD), announced on
March, a reengineering of the Customs administration as a whole, with the
participation of the private sector, universities and research centres is needed. Risk
management also facilitates continual improvement of the organization and it should
be embedded in all the organization´s practices and processes (ISO 31.000:2009).
Changes in the Customs organizational architecture must also be accompanied by
greater sharing of information and resources, related to Customs risk management
best practices. The WCO building capacity work should be constant and continuous
for the Customs risk management, in order to curb illegal trade practices and spread
the sharing of best practices, as well as providing assistance in the implementation,
and sharing of information from the WCO Global Information and Intelligence
Strategy (GIIS).

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